As part of the Inflation Reduction Act of 2022, the credits available for making energy-efficient home improvements have been expanded.
Expanded credits are available for certain qualified expenses for tax years starting in 2023 and ending after 2032. The credit is 30% of qualified expenses, up to a maximum credit that depends on the type of property being purchased. For heat pumps, up to a $2,000 credit is allowed, and for energy-efficient home improvements, up to a $1,200 credit is available. The credit is claimed in the year the installation is completed.
Unlike the prior rules, there is no lifetime limit. Under the old law, there was a $500 lifetime limit. Under the new law, it is an annual limit, meaning that if the $1,200 credit was taken in 2023, and additional expenses were incurred several years later, another $1,200 credit can be claimed.
There is no income threshold whereby this credit phases out. So higher-income taxpayers can also receive a benefit.
Watch for These Rules
As always, there are additional restrictions and rules that apply. The credit in general is only available for improvements made to a main home, although there are certain exceptions for improvements made to a second home. This is a personal, not a business credit. If the property is used for business purposes more than 20% of the time, the credit is limited.
The credit is nonrefundable, meaning that it can not reduce tax below $0. Since there is no carry forward of any unused credits for energy-efficient improvements, this could cause a loss of the tax benefit.
The improvement must meet the definitions of qualified property for purposes of the credit. Careful analysis can be required. For example, the credit is available for certain water heating equipment, but not if the equipment is being used to heat a swimming pool or hot tub.
The Inflation Reduction Act may have other tax benefits that apply to your situation, such as clean energy purchases like solar panels or buying an electric vehicle. Some states also have their own related credits. The team at Wegner CPAs can help make sure the maximum available tax savings are claimed.
