The Inflation Reduction Act of 2022 expanded the energy efficient home improvements and solar credits available to individuals in 2022 through 2032. If you are planning on upgrading your home, you may be eligible for tax credits if the items you are installing meet the Federal energy efficiency standards.
What are the credits available to homeowners?
There are 2 main credits available:
- Energy Efficient Home Improvement Credit which covers energy efficient home improvements like windows, doors, and large appliances such as air conditioners and water heaters (discussed below);, and
- Residential Clean Energy Credit which is more broadly known as the solar credits and covers the installation of solar harnessing equipment, battery storage, and other clean energy like wind and thermal.
What home improvements could qualify for a credit and how much is it worth?
Under Energy Efficient Home Improvement Credit (IRC Section 25C), for 2023 and beyond, the percentage of the costs was increased to 30%. There are further annual limitations per property type and an annual limit of $1,200 for all energy efficient home improvements. The most common home improvements included are:
- Building Components
- Exterior doors (30% of cost up to $250 per door, $500 annual total),
- Exterior windows and skylights (30% of cost up to $600), and
- Insulation materials or air sealing materials (30% of cost).
- Residential Energy Property (30% of cost, including labor, up to $600 for each item)
- Central Air Conditioners,
- Water heaters, and
- Furnaces or hot water boilers.
- The above must meet the energy efficient requirements to be deductible.
What costs are included to calculate the solar tax credit?
The Residential Clean Energy Credit includes:
- Solar Panels or cells (property),
- Contractor labor costs: onsite preparation, assembly, original installation including permitting fees, inspection costs, and developer fees,
- Balance of System equipment; including writing, inverters, and mounting equipment,
- Batteries (Energy storage devices), and
- Sales tax on the above eligible expenses.
What is the amount of credit?
Under the Residential Clean Energy Credit (IRC Section 25D):
- 30% of the installation and property costs for solar panels and battery storage for systems placed in service in 2022-2032 (it was retroactively reinstated to 1/1/2022).
- Solar systems installed in 2020-2021 received a 26% tax credit.
- Credits will decrease to 26% for systems installed in 2033 and 22% for systems installed in 2034.
- The credit is set to expire in 2035 unless renewed by Congress.
What about the cost to replace or repair my roof which is necessary before adding solar panels?
Sorry, but no. Traditional roofing materials do not qualify for the credit because they primarily serve as a roofing or structural function. However, some solar roofing tiles and solar roofing shingles can serve as both a solar electricity collector and as a roofing material, and those would qualify for the credit.
Is the credit only for solar panels?
No! While a majority of taxpayers will use this credit for solar systems, the credit is also for fuel cells, small wind energy, geothermal heat pumps, biomass fuel cells, and qualified battery storage expenditures.
What if I finance my solar panels instead of paying upfront?
If you are contractually obligated to pay the full cost of the system, then you can claim the federal solar tax credit based on the full cost of the system in the year installed. However, the cost of the financing (interest, origination fees, or extended warranty) are excluded when calculating your credit.
Does the credit carry forward?
Yes! This is a non-refundable tax credit which means it will offset your tax liability, but you will not receive a refund if the credit exceeds your liability. The unused credit can carry forward for 5 years.
Does my state or utility credit affect my federal tax credit?
No! State tax credits or those received from local utilities for installing solar systems generally do not reduce the federal tax credit.
Do I receive a tax credit for installing a solar system on my rental property?
No, the credit is only for personal use property. However, improvements made to a rental property can be capitalized and depreciated, so you are able to deduct the full cost of the solar installation over the lifetime of the asset (typically 5-7 years).
Can I take a tax credit for solar on my 2nd home?
Yes, the credit is for personal use properties (not used as a business property like a rental). There is no specific exclusion for a 2nd home in the Inflation Reduction Act of 2022.
Does a battery qualify for the solar tax credit?
Yes! Battery storage is increasing in popularity but must be installed in a U.S. personal use property and have a capacity of 3 kilowatt hours or more. You can receive the 30% credit for the installation of qualified battery storage whether you are installing it as part of a full new system, adding batteries to an existing system, or installing a stand-alone battery.
If you have any questions about whether the home improvements that you are planning or have already completed are eligible, please contact our team to discuss your specific tax situation.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and start-up/emerging growth companies. Building connections beyond the code.