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The Inflation Reduction Act (IRA) of 2023 has brought significant changes to the tax landscape, offering several benefits to individuals and households looking to make energy-efficient home improvements. One of the notable provisions in the IRA is the Energy Efficient Home Improvement Tax Credit, also known as Section 25C. This tax credit, which became effective on January 1, 2023, encourages homeowners to invest in energy-efficient upgrades for their homes. In this article, we will delve into the key details of this tax credit, including eligibility, the types of improvements covered, and the associated benefits.

Energy Efficient Home Improvement (25C) Tax Credit

The Energy Efficient Home Improvement Tax Credit, part of the IRA, is designed to incentivize homeowners to make energy-efficient improvements to their properties. These improvements not only help reduce energy consumption and lower utility bills but also contribute to a more sustainable and eco-friendly environment.

Key Highlights of the Energy Efficient Home Improvement Tax Credit:

Commencement Date: The tax credit program began with the tax year 2023, which means that homeowners can claim the credit on their 2023 taxes when they file in 2024.

Eligible Improvements: The tax credit covers various energy-efficient home improvements, including but not limited to:

  • Upgrading your breaker panel.
  • Adding or improving insulation in your home.
  • Upgrading or installing fossil fuel systems that meet elevated efficiency limits.

Maximum Credit Amount: Homeowners can claim a tax credit of up to $600 per item for improvements such as the breaker panel, insulation, and fossil fuel systems. The maximum total tax credit for these improvements is $1,200.

Heat Pump and Heat Pump Water Heater Installations: A separate cap of 30% up to $2,000 is applicable for heat pump and heat pump water heater installations. However, these systems must meet or exceed the highest performance tier set by the Consortium for Energy Efficiency (CEE).

Annual Reset: The tax credit resets every year, allowing households to claim credits on eligible installations completed during the tax year. This means that you can take advantage of the credit in any, and each, year through 2023, as long as you make eligible improvements.

Tax Liability: To benefit from this tax credit, households must have adequate tax liability to offset the credit amount. In other words, the credit can reduce your tax liability but cannot result in a refund if your tax liability is already zero.

Tax Credit and Rebate Eligibility: Homeowners may qualify to receive both a tax credit and a rebate for the same energy-efficient improvement project. This can provide additional financial incentives to encourage the adoption of energy-efficient technologies.

Learn more about the Inflation Reduction Act here.

Federal Income Tax Credits and Incentives for Energy Efficiency

Information updated 12/30/2022

The Inflation Reduction Act of 2022 provides federal tax credits and deductions that empower Americans to make homes and buildings more energy-efficient to help reduce energy costs while reducing demand as we transition to cleaner energy sources.

Savings for Homeowners

New federal income tax credits are available through 2032 providing up to $3,200 annually to lower the cost of energy-efficient home upgrades by up to 30 percent. Improvements such as installing heat pumps, heat pump water heaters, insulation, doors, and windows, as well as electrical panel upgrades, home energy audits, and more, are covered by the tax credits and can help families save money on their monthly energy bills for years to come.
In addition to the energy efficiency credits, homeowners can also take advantage of the modified and extended Residential Clean Energy credit, which provides a 30 percent income tax credit for clean energy equipment, such as rooftop solar, wind energy, geothermal heat pumps, and battery storage through 2032, stepping down to 22 percent for 2033 and 2034.

Savings for Home Builders

The Inflation Reduction Act of 2022 updates and extends the Section 45L New Energy Efficient Home Credit (§ 45L credit). For homes and apartments (referred to as dwelling units in § 45L) acquired on or after January 1, 2023, the tax credit for home builders is specifically tied to certification to an eligible version of the relevant ENERGY STAR program requirements for single-family, manufactured, and multifamily homes, and the tax credit has been extended through 2032.

Savings for Commercial Building Owners

The Inflation Reduction Act of 2022 extends and expands the energy-efficient commercial buildings deduction that was made permanent under Section 179D in 2021. Buildings that increase their energy efficiency by at least 25 percent will be able to claim this deduction, with bonuses for higher efficiency improvements.

*Disclaimer: The tax credit information contained within this website is provided for informational purposes only. It is not intended to substitute for expert advice from a professional tax/financial planner or the Internal Revenue Service (IRS).

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