Finance Forward Blog

As energy costs continue to rise and environmental concerns grow, homeowners are increasingly looking for ways to make their homes more energy-efficient. Fortunately, the U.S. government offers tax incentives to encourage these upgrades. In this post, we'll break down the two main types of residential energy credits available to homeowners, helping you understand how you can save money while reducing your carbon footprint. There are two separate, nonrefundable residential energy credits, both reported on Form 5695 as detailed below.

Residential Clean Energy Credit (5695 Part I)

This credit focuses on green power generation and storage:

• 30% credit on qualifying expenditures (except for fuel cell property, which is limited to $500 per half kilowatt of capacity)

• Covers solar, wind, geothermal power generation, solar water heaters, fuel cells, battery storage

• Nonrefundable but can carry forward

• No lifetime limit; no annual limit

• Applies to primary residences and qualifying secondary residences (no rentals)

Energy Efficient Home Improvement Credit (5695 Part II)

This credit targets energy-efficient home upgrades, including qualifying equipment, energy audits, and associated labor:

• 30% credit on qualifying expenditures, with limits* (see chart)

• Includes doors, windows, insulation, cooling and heating, stoves, energy audits

• Nonrefundable and cannot carry forward

• No lifetime limit; annual limit $3,200

• Applies to primary residence only – existing home, not new construction

Criteria for specific items*

*See www.EnergyStar.gov for comprehensive list and qualifications

Residential Clean Energy Credit

• Solar water heaters – must be certified by the Solar Rating Certification Corporation or comparable entity.

• Geothermal heat pumps – must meet Energy Star requirements in effect at time of purchase.

• Battery storage technology – must have a capacity of at least 3 kilowatt hours.

Energy Efficient Home Improvement Credit

Building Envelope Components (must have an expected lifespan of at least 5 years):

• Exterior doors – must meet applicable Energy Star requirements.

• Exterior windows & skylights – must meet Energy Star Most Efficient certification requirements.

• Insulation and air sealing materials/systems – must meet International Energy Conservation Code standards in effect at the start of the year 2 years before installation.

Residential Energy Property:

• Includes central A/Cs, natural gas, propane or oil water heaters, natural gas, propane or oil furnaces or hot water boilers.

• Generally, must meet or exceed the Consortium for Energy Efficiency (CEE) highest efficiency tier in effect at the beginning of the year when the property is installed. Labor for installation may be included.

• Air conditioners and heat pumps must have a SEER2 rating of 16 or higher.

Energy Property:

• Includes electric or natural gas heat pumps, electric or natural gas heat pump water heaters, biomass stoves and boilers.

• Must meet or exceed the CEE highest efficiency tier in effect at the beginning of the year when the property is installed. Labor for installation may be included.

• Air conditioners and heat pumps must have a SEER2 rating of 16 or higher.

• Biomass stoves and boilers with a thermal efficiency rating of at least 75% qualify for a credit up to $2,000 per year.

Conclusion

Taking advantage of these residential energy credits can help offset the costs of making your home more energy-efficient. Not only will you save money on your taxes, but you'll also enjoy lower energy bills and contribute to a cleaner environment. Remember, tax laws can be complex and change frequently, so it's always a good idea to consult with a tax professional before making major home improvements. By understanding these credits and planning your home upgrades strategically, you can maximize your savings and create a more comfortable, efficient living space.