We are excited to shine light on two tax credits that can transform your home into an energy-efficient haven while putting money back in your pocket: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit.
The Energy Efficient Home Improvement Credit is designed to reward homeowners who make qualifying improvements to their residences to enhance energy efficiency. It has been around for years but up until tax year 2023 there was a $500 lifetime cap.
There is now a $1,200 general aggregate yearly credit limit so energy efficiency expenditures will be relevant information to provide each tax season through at least 2033 when the legislation is set to expire.
Certain improvements only qualify if at taxpayer’s primary residence:
- Exterior doors, windows and skylights, insulation materials, air sealing materials;
- Home Energy Audits: Massachusetts residents can receive a No-Cost Energy Assessment through Mass Save – there is no tax credit associated with the assessment alone because it is fully subsidized.
Others qualify for both primary residence & vacation home (but not rental property*):
- Central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; and improvements to panelboards, sub-panelboards, branch circuits, or feeders.
- *The expense for any such improvement to a rental property would still be fully deductible, it just doesn’t qualify for the tax credit as well.
Confirm the property meets Energy Efficiency Requirements before factoring the tax credit into any purchase.
Homeowners get up to a 30% credit for the cost qualifying improvements subject to the $1,200 yearly cap. Many specific types of home improvements projects have lower credit limits:
- $500 for exterior doors (no more than $250 per door);
- $600 for windows and skylights, natural gas, propane or oil water heaters, electric panels, central air conditioners, natural gas, propane or oil furnaces or hot water boilers.
Some improvements have a separate (and higher!) yearly credit limit of $2,000: Biomass stoves or boilers; electric or natural gas heat-pump water heaters, electric or gas heat pumps.
Here is an example. In 2023, you put in your home a natural gas heat pump that costs $8,000 with installation, a $3,000 natural gas tankless water heater and a central air conditioner costing $7,000. Your total maximum credit is $3,200…$2,000 for the heat pump, $600 for the water heater and $600 for the air conditioner.
The Residential Clean Energy Property Credit provides an incentive for homeowners to invest in renewable energy systems. Qualifying improvements are solar panels, solar-powered water heaters, geothermal heat pumps, wind turbines, battery storage technology and fuel cells.
Improvements qualify for primary residence & vacation home (but not rental property*). Fuel cell property is the only improvement that only qualifies if at primary residence.
- *The expense for any such improvement to a rental property would still be fully deductible, it just doesn’t qualify for the tax credit as well.
The credit equals 30% of the cost of materials and installation but, most importantly, there are not yearly or lifetime maximum credit dollar limits for solar, geothermal, wind, or battery storage systems. That means renewable energy expenditures will be relevant information to provide each tax season through at least 2034 when the legislation is set to expire.
Any rebate you receive in connection with installing a renewable energy system is nontaxable, but it reduces the cost for calculating the credit value. Here is an example. In 2023, you install a $35,000 solar panel system in your home and get a $1,000 installation rebate from Mass Save. Your tax credit is $10,200 (30% x ($35,000 – $1,000) …not $10,500.
Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are nonrefundable personal tax credits. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability. A taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year.
Please remember that these credits have specific eligibility requirements, and not all improvements or systems may qualify. It is essential to keep detailed records, including receipts and certifications to support any claim of the tax credits.