Q: Can you cover the "ins and outs" of energy credits for individuals, especially those related to personal residences?— S.L., email
This is a very timely question, S.L., because there have been several recent adjustments to these credits in name, type and amount. The most recent change was part of the Inflation Reduction Act of 2022 (IRA 2022) passed in August.
We'll discuss how the IRA 2022 (no relation to Individual Retirement Accounts) affects the existing tax credits, eligible expenditures and credit limitations. Today will include a general overview of the residential energy credits. Look for more specific details of what qualifies as eligible costs next Sunday.
Tax Talk:Changes in 2022 federal and state tax laws that Hoosiers should be aware of
There are two energy credits (both reported on IRS Form 5695) related to a personal residence. Residential clean energy credit is the new moniker for the former "residential energy efficient property credit." The credit rate for property placed in service in 2022 through 2032 is 30%. Energy efficient home improvement credit was formerly the "nonbusiness energy property credit." IRA 2022 extended this credit through December 2033.
Who can take these credits? Individuals making energy-saving improvements to a main home located in the United States. Some provisions may apply to a secondary residence, but these are more limited. The costs that are eligible for both credits are treated as being paid when the original installation of the item is completed, or, in the case of costs connected with the reconstruction of your home, when your use of the reconstructed property begins. Thus, some 2022 costs may not be eligible until a subsequent year when you complete the installation and/or begin using the reconstructed residence. And any credit recognized reduces the basis of your home.
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What are the important differences in the two credits? The "residential clean energy credit" is available for bothexisting homes as well as homes being constructed and can be carried over. This is a 30% credit for qualifiedexpenditures (e.g., solar panels, solar water heaters, geothermal heat pumps, wind turbines, fuel cell property orbattery storage technology that relate to residential energy efficient property). IRA 2022 extended this credit through 2034 while applying a lower percentage in the last two years. The "energy efficient home improvement credit" is only available for existing homes, has a maximum amount of $500 and any unused credit is not allowed to be carried over. From 2023 through 2032, this credit will increase to include a $1,200 aggregate for all buildingenvelope components (e.g., doors, windows, insulation), home energy audit costs and energy property. Electricor natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomassboilers encounter a separate aggregate yearly credit cap of $2,000. Thus, the maximum total yearly energy efficient home energy credit is $3,200 depending on what combination of items are purchased.