Going Green: Tax Credits for Energy Efficient Home Improvements
If you made improvements to your home to increase its energy efficiency this year, good news! You may qualify to claim one of two different tax credits: the Non-Business Energy Property Credit or the Residential Energy Efficient Property Credit (REEP). Each credit is a little bit different, but they both may help you cut taxes and save on energy bills at the same time.
Non-Business Energy Property Credit
What is it?
The Non-Business Energy Property Credit is a credit for making qualifying improvements that increase the heating and cooling efficiency on your primary residence. There are generally two categories of property that can qualify for this credit.
- Qualified energy efficiency improvements
- Residential energy property expenditures
What Property Qualifies?
- Qualified energy efficiency improvements are those that fall under the category of “building envelope components”. The building envelope is the physical separation between the interior and exterior of the house. Any improvements must 1) meet or exceed certain efficiency criteria, 2) be installed into your primary residence and 3) be expected to be used for at least five years. Eligible items may include:
- Insulation material or systems
- Exterior windows, skylights or doors
- Storm windows and storm doors
- Certain metal roofs
- Certain asphalt roofs
- Residential energy property expenditures are actually the energy property you incorporate into your primary residence. Eligible items may include:
- Electric heat pumps
- Central air conditioners
- Natural gas, propane or oil hot water heaters
- Advanced main air circulating fan used in natural gas, propane or oil furnace
- Biomass fuel stoves which burn plant-derived fuel on a recurring or renewable basis
What is a Primary Residence?
You can’t just claim the credit for improving any property. The home you improve must be considered your primary residence. Primary residence generally means that you must actually own the home and use the home as your principal or main residence when the qualifying property is installed.
How Much is the Credit?
Generally you may claim 10% of the amount paid or incurred for qualified energy efficiency improvements during the year and any residential energy property costs paid or incurred during the year. Be aware that there are limitations for the amount of credit that may be claimed.
In addition, the basis in the qualifying property is reduced by the amount of the credit. Any unused credit is nonrefundable and can’t be carried forward. Therefore, any credit that is more than your tax liability is lost.
Residential Energy Efficient Property Credit
What is it?
REEP is a nonrefundable personal credit available for certain energy-efficient property installed in a dwelling unit. This credit helps pay for qualified residential alternative energy equipment.
What Types of Property Qualify?
Types of property that may qualify for the credit include:
- Solar electric property
- Solar water heating property
- Fuel cell property
- Small wind energy property
- Geothermal heat pump property
What is a Dwelling Unit?
This includes a house, apartment, mobile home, boat, etc., which provides basic accommodations such as sleeping area, toilet and cooking facilities. For most property qualifying for this credit, installation must be in a dwelling unit that you own and use as a residence. This also includes property installed on a second home provided the taxpayer does not rent this home out for use.
How Much is the Credit?
Generally you may take a credit of 30% of your costs of the qualified property. This includes any labor costs allocable to the onsite preparation and assembly of the property to the home. Again, watch out for overall credit limitations when claiming the credit.
Basis in the qualifying property is reduced by the amount of the credit. Any unused credit is nonrefundable, but may possibly be carried forward to the following tax year.
For more information about both credits, check out the IRS Instructions for Form 5695 “Residential Energy Credits.”
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Head of household is a filing status for single or unmarried taxpayers who have maintained a home for a qualifying person, such as a child or relative. This filing status provides a larger standard deduction and more generous tax rates for calculating federal income tax than the Single filing status.