Every year around tax time, you start to hear about federal tax incentives. They are also called tax credits, and chances are you don’t pay much attention to them, since you might think they won’t apply to you. Besides, you have enough to worry about just filling in the right amounts from the W-2s. You don’t have time to worry about something as complicated as tax credits.
Well, you might want to rethink that strategy. The truth is, tax credits are an uncomplicated way to reduce the amount of taxes you have to pay. And with energy tax credits, you can get credits for the money you’ve invested in installations that make your home more energy-efficient.
In this article, we’ll take a look at federal home energy tax incentives, the benefits they provide to homeowners, and whether or not you may be eligible to get them.
What Is a Federal Energy Tax Credit?
A tax credit is any amount that a taxpayer can subtract from the amount of taxes owed to the IRS. Don’t get credits confused with deductions. While deductions lower the amount of taxable income, a tax credit reduces the amount of tax owed.
In the case of energy tax credits, you can claim a federal tax credit if you make improvements to your home or have installed appliances that increase energy efficiency. If you make home improvements that increase energy efficiency before January 1, 2024, you are eligible to claim these credits as long as you follow the proper procedures when you are filing your taxes.
How Does a Federal Energy Tax Credit Work?
There are two types of residential energy tax credits: residential and non-business. Residential tax credits include solar, wind, geothermal, and fuel-cell technologies, such as solar panels, solar-powered water heaters, and geothermal heat pumps. Nonbusiness tax credits cover materials and equipment that meet the standards of the Department of Energy and include items such as insulation, roofs, and windows.
Residential Energy Tax Credit
If a homeowner with property located in the United States installs alternative energy equipment to make the home energy efficient, the homeowner can claim a residential energy efficient property credit. Based on when the homeowner made the changes, the percentages are as follows:
- 30% for changes made after December 31, 2016 but before January 1, 2020
- 26% for changes made after December 31, 2019 but before January 1, 2023
- 22% for changes made after December 31, 2022 but before January 1, 2024
In order to file for an energy tax credit, you need to complete and file an IRS form 5695 with your tax return. Since this is a tax credit, don’t think of it as a refund. You won’t be getting this money back, but it will be deducted from the amount of taxes that you owe. The good part is, any unused portion is carried over to the following year’s return, so you never lose any of it.
Non-Business Energy Tax Credit
This tax credit can be claimed for any eligible home improvements you made in 2021. The credit covers 10% of the cost of the equipment, including items such as home insulation, exterior doors, electric heat pumps, and central air conditioning systems. Just as you would with residential credits, this would also be filed on an IRS form 5695.
What Qualifies as Energy Efficient Home Improvements?
You want to do your part in making your home as energy efficient as possible and you deserve to take advantage of the tax credits that are available. But which appliances and equipment are eligible for the tax credits? Any purchases of products that are recognized as Energy Star are eligible, including the following:
For residential energy property costs:
- Air Source Heat Pumps: $300
- Central Air Conditioning: $300
- Gas, propane, or Oil Hot Water Boilers: $150
- Gas, propane, or oil furnaces and fans: $150
- Non-solar water heaters: $300
- Advanced Main Air Circulating Fan: $50
- Biomass Stove: $300
For qualified energy efficiency improvements:
- Insulation: 10% of the cost
- Roofs: 10% of the cost
- Windows, Doors, and Skylights: 10% of the cost
If you have purchased and installed any of these Energy Star products in your home, be sure to file for the energy tax credit on your tax form.
What Are the 2022 Solar Tax Credits?
If you install a solar energy system in your home, you can deduct 26% of the cost of installation. Among the costs that can be deducted are the cost of the solar panels, labor costs including permit fees and inspection costs, and any additional solar equipment that is installed. Just be sure that you own the system. If you sign a lease or a power purchase agreement with a solar installer, you are not the owner of the system and will not be eligible for the credit.
Some homeowners might want to look into further incentives that may be available for installing solar energy in their homes. You might be able to get rebates from your utility company or you might even try to get a state tax credit in addition to the federal tax credit. Just be aware that if you get a state tax credit, you will have less state income tax to deduct from your federal return because the income will be higher.
Energy tax credits are a great way to save money on smart investments you’ve made to make your home more energy-efficient. Nick’s Air Conditioning can help with home improvements that may be eligible for tax credits, including Energy Star appliances and equipment. Call us today at (346) 471-2499 to speak to one of our experts or contact us on our website to find energy-efficient solutions for your home.