What You Need to Know About Residential Energy Credits for Energy Efficient Homes
How You Can Benefit from $35 Billion in Residential Energy Tax Credits
Since 2006, the U.S. government has allowed more than $35 billion in tax credits to encourage homeowners to increase the energy efficiency of their homes. As climate concerns grow and power grids become less reliable, Congress has more reason than ever to encourage homeowners to invest in energy saving solutions.
The IRS currently offers two residential tax credits for homeowners investing in alternative energy sources and energy-efficient improvements to their homes. The Residential Energy Efficient Property (REEP) Credit offers taxpayers virtually unlimited savings, while the Nonbusiness Energy Property Credit is subject to certain limitations.
Here we discuss important items to be aware of that can help you take advantage of these credits and potentially reduce your tax liability. Read on to learn more about these tax savings—and why it may be better to act sooner rather than later.
Internal Revenue Code (IRC) Section 25D: REEP Credit
Solar panels are by far the largest use of the REEP Credit. Often called the Federal Solar Tax Credit, the REEP Credit gained its popularity by significantly offsetting the cost of these panels. In fact, the solar industry has grown more than 10,000 percent since the credit was introduced in 2006.
But the REEP Credit isn’t just for solar panels. Other eligible property includes certain geothermal heat pumps, small wind turbines, biomass fuel stoves, fuel cell property , and more. The credit also includes costs related to solar energy storage for these systems, such as Tesla’s Powerwall battery.
The REEP Credit can be claimed for installations at both the taxpayer’s primary and secondary U.S. residences, including houseboats and newly constructed homes. In general, rental properties are excluded from the REEP Credit. However, if the taxpayer uses the property for personal use during the year, the credit may be adjusted for the amount of time the taxpayer occupied the residence.
As long as the taxpayer owns the qualifying property placed in service, he or she is likely eligible for these savings. You can learn more about what qualifies at the government’s ENERGY STAR® webpage.
How Much Can I Claim?
The REEP Credit offers the greatest potential tax savings for homeowners looking to invest in alternative energy solutions. That’s because there’s no dollar limit on the amount a taxpayer can claim, although the credit cannot exceed the individual’s regular tax and alternative minimum tax liability.
Taxpayers are entitled to a REEP Credit up to 26 percent of the cost of any qualified property (including tax and installation) placed in service between 2021 and 2022. The credit drops to 22 percent in 2023, after which it’s set to expire. (It’s important to note the applicable percent depends on the year the property is placed in service, not the year it is purchased.)
For example, let’s say a homeowner pays $50,000 to install a qualified alternative energy source to his or her home, and it’s placed in service in 2022. The taxpayer may claim a REEP Credit up to $13,000 (or 26 percent of the property’s cost) on his 2022 tax return, as long as the credit doesn’t exceed his or her tax liability. Any credits in excess of an individual’s tax liability may be carried forward to the subsequent tax year. Of course, these savings are in addition to any reductions in a homeowner’s power bill—a double benefit!
IRC §25C: Nonbusiness Energy Property Credit
The Nonbusiness Energy Property credit has significantly more limitations than the REEP Credit, including a lifetime limit of $500. Still, taxpayers looking to make smaller energy improvements to their homes should consider whether they qualify for this credit.
Eligible taxpayers may claim a nonbusiness energy credit up to 10 percent of the cost related to any qualified energy-efficient improvements, including exterior windows, doors, skylight, roofs, and insulation. A credit can also be claimed for 100 percent of any improvements classified as residential energy product costs. These include installation costs of qualified heating and air conditioning systems, water heaters, and biomass stoves.
The credit only applies to a taxpayer’s principal U.S. residence and cannot be claimed for original installation in newly constructed homes. The IRS also has specific dollar caps on the amount taxpayers can claim on certain items. As a reminder, all qualifying improvements are subject to an overall lifetime credit of $500. As with the REEP Credit, all products must meet standards set by the U.S. Department of Energy to be eligible for these credits.
The IRS offers two tax credits to incentivize homeowners to make their homes eco-friendly. Individuals interested in making home improvements should consider whether they qualify for the REEP Credit or the Nonbusiness Energy Property Credit. By taking advantage of these credits, taxpayers can feel good knowing they saved green by going green.
For assistance with determining your eligibility and claiming these residential energy tax credits, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.