Understanding the basics of the energy efficient home and residential clean energy tax credits

If you are a homeowner and have been thinking about upgrading your home to be more energy efficient by installing energy efficient doors, windows, adding insulation, installing heat pumps, etc., this article will help you plan accordingly, depending on your goals and could potentially save you money on federal income taxes if a plan is well-executed.

Most people will decide to make energy efficient upgrades to their homes for  environmental reasons, to manage electricity consumption and save money on electricity, or both.

Whatever the reasons, you may need to plan to achieve some tax savings for the work. Below, an explanation of the two kinds of energy tax credits is provided as well as some tax planning tips to help the reader benefit from making a desired upgrade.

There are two kinds of energy tax credits that you can qualify for as a homeowner: The Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit.

The Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit is for existing main homes and applies to exterior doors and windows, insulation, heating, air conditioning and water heaters. You may qualify for up to $3,200 in tax credits.

For each item, satisfying the energy efficiency requirements, the credit is 30% of the costs, including labor. The maximum credit you can claim each year is: $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150); $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

The credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033. 

The credit is nonrefundable, so you can't get back more on the credit than you owe in taxes. You can't apply any excess credit to future tax years.

Depending on what your current year tax liability is going to be in 2024, you may want to consider reducing the tax payments or withholdings by the estimated credit if the energy efficient property will be installed in 2024. To receive the full benefit of the credit, adjust the withholding for a W-2 employee or reduce the estimated payments for contractors and business owners filing a Schedule C. This credit will only reduce the tax liability and will not be refunded to the taxpayer. So, in this case, it is better to owe and utilize every cent of the credit and pay the balance.

If you are due a refund, no benefit will be received, and you cannot carry forward any unused tax credits generated by the Energy Efficient Home Improvement. Therefore, the credit will never be claimed.

For example, let's say Joe Smith qualifies for up to $1,200 in credits because Joe made some energy improvements to his home. Let’s also assume that at the end of the year, Joe will owe an additional $1,000 in federal taxes. The $1,200 credit will offset his $1,000 to $0. The $200 leftover credit that was not utilized will never be claimed and used because it can’t be carried forward under the Energy Efficient Home Improvement Credit. Therefore, it is recommended that Joe reduces the withholding to fully utilize the credit.

The Residential Clean Energy Credit

The Residential Clean Energy Credit would apply if one invests in renewable energy for one’s home, such as solar, wind, geothermal, fuel cells or battery storage technology; you may qualify for an annual residential clean energy tax credit. The credit is 30% of the cost of the new, qualified clean energy property for the home installed anytime from 2022 through 2032.

Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are nonrefundable personal tax credits. You can only use it to decrease or eliminate the tax liability.

However, under the Residential Clean Energy Credit, any unused credit can be carried forward to the next year.

Let’s assume Joe Smith had an additional tax liability of $10,000 for his 2024 taxes. Let’s also assume that in 2024, Joe installed a solar system that cost him $50,000. The credit Joe would use to offset the tax liability would be $15,000 ($50,000×30%). Since the credit is greater than the tax liability, Joe’s tax liability will be reduced to $0, and $5,000 will not be refunded to Joe but carried forward to the next year. This treatment is only true for the Residential Clean Energy Credit, but not for the Efficient Home Improvement Credit.

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Ambrose Kizza, MSA, MST, CFE, EA, is an enrolled agent and the owner of Kizza Tax & Accounting, a tax and accounting firm located in Gilford, and specializes in taxation of individuals and businesses and advises business owners on tax strategies that help them achieve real tax savings. Kizza holds a master's in accounting and master's in taxation from Suffolk University in Boston and has been a tax and accounting practitioner for 11 years. He can be reached at ak@kizzaea.com or 603-800-7922.