Which Home Improvements Qualify for Residential Energy Credits?
Upgrading your home to make it more energy-efficient doesn’t just help the environment. It also helps your wallet through reducing your energy costs, increasing your property’s value, and giving you money back in the form of residential energy tax credits for home improvements.
Help is at hand because you can take care of some of those upfront costs with the help of tax breaks on specific home improvement projects. Here’s what you need to know to claim the residential energy tax credit.
Table of Contents
- 1 What You Need to Know About Residential Energy Tax Credits
- 2 What You Need to Know About Residential Renewable Energy Tax Credits
- 3 How Can You Claim Your Residential Energy Tax Credits?
- 4 How Much are Residential Energy Tax Credits Worth?
- 5 What are Non-business Energy Property Tax Credits?
- 6 How Much are These Credits Worth?
- 7 What are the Other Advantages of Improving Your Homes Energy Efficiency?
- 8 Conclusion
- 9 How to Claim Residential Energy Tax Credits
What You Need to Know About Residential Energy Tax Credits
The Bipartisan Budget Act 2018 extended many of the energy tax credits brought in under the Obama Administration. These tax credits have been extended until 2021, but they do decrease in value every year, so now has never been a better time to consider energy-efficient home improvements.
The Ways and Means Committee also brought in legislation to extend credits for energy-efficient improvements made to noncommercial properties. However, that has yet to pass because of the end of the 2018 Congressional session.
These credits are generous, but there are strict rules on what does and what doesn’t qualify. Be aware of these rules before starting any project.
What You Need to Know About Residential Renewable Energy Tax Credits
Here’s a short guide on which improvements qualify for residential renewable energy tax credits. If you qualify, the credit will be worth 30% of the costs of:
- Solar panels for generating electricity in a residential property.
- Water heaters powered by solar energy that provide at least half of the home’s total water heating in a residential property.
- Any wind turbines used to generate energy in a residential property.
- Fuel cells that generate a minimum of 0.5 kW. They must have an efficiency rating of at least 30% in a primary residence.
- Any geothermal heat pumps used for both cooling and heating a residential property.
These tax credits apply to newly built homes, from the minute you make it your residence. They also apply for an existing primary or secondary property. However, the fuel cells tax credit only applies to primary residences.
How Can You Claim Your Residential Energy Tax Credits?
For the purposes of claiming residential energy tax credits, you must file Form 5695 with your tax return. You’ll need to be able to supply information regarding the costs of installing your energy-efficient system.
H&R Block Online Tax Filing provides you with step by step instructions to insure that you get every tax deduction and energy credit that you are eligible for.
Any systems must meet the strict IRS rules on eligibility.
To show you an example of this, we are going to look at solar water heaters.
If you want to claim a tax credit for these heaters, you must choose a heater that has been certified by the Solar Rating Certification Corporation. There are alternative certifications, but they must be endorsed by your state government. That water heater also must-see half of its energy generated by solar power.
This sounds complicated, but the IRS provides full guidelines for Form 5695 that you can refer to.
The credit must be claimed for the tax year when it’s installed. For newly constructed homes, you would claim the credit for the tax year when you began living in the home.
Residential energy tax credits are nonrefundable, so they can reduce your tax bill to zero, but you can’t get a tax refund. Plus, the total amount of tax credits can’t exceed the amount of tax owed.
The good news, however, is that if you can’t claim the full credit the remaining value of the tax credit is carried over to the following tax year.
How Much are Residential Energy Tax Credits Worth?
The amount you can get back through residential energy tax credits varies. This is because it depends on the system you install, how much it costs, and how big your tax bill is for this year.
Generally, you can claim up to 30% of the overall cost of installation, which includes any labor costs.
To give you an example, a common 10kw solar panel system could yield over $7,000 in credits, assuming you qualify for the entire 30% credit. If you owe less than this on your tax bill, however, the credit is capped at the same amount.
What are Non-business Energy Property Tax Credits?
The non-business energy property tax credit has expired. Unless Congress renews the act, you won’t be able to claim it. However, if it is renewed and remains unchanged it’s important to be prepared for what it’s worth and the rules regarding it.
Some of these improvements that qualify for the tax credit include:
- Installing insulation.
- Adding skylights, exterior doors, and energy-efficient windows.
- Upgrading to a metal roof that includes pigmented coatings. Alternatively, you can install cooling granules as part of an asphalt roof.
- Purchasing air conditioners, water heaters, and stoves that utilize biomass.
- Installing air circulating fans, but they must qualify.
- Utilizing an energy-efficient boiler or furnace.
They must be installed during the tax year that you’re applying for the credit in, and they only apply to primary residences.
You must meet the rules and regulations to qualify for these credits. For example, the improvements must be made to your primary residence and each improvement must meet the energy standards. In the case of upgrades like windows and roofing, they must have a life expectancy of at least five years.
How Much are These Credits Worth?
If these tax credits are extended under the same rules, you can claim back 10% of the total cost of installation, which includes labor costs
But regarding specific improvements, there are limits.
There’s a maximum credit limit of $500 for all tax years after the 2005 tax filing season. For windows, this maximum limit is set at $200.
The maximum credit for air circulating fans is $50, $150 for furnaces and boilers, and $300 for any building property classified as energy-efficient.
So, if you’ve claimed $500 in credits in the past, you won’t have the option to claim these credits again.
What are the Other Advantages of Improving Your Homes Energy Efficiency?
Taking advantage of tax credits is one reason for making energy-efficient upgrades to your home. However, there are other reasons too.
Superior energy efficiency will lower the costs of energy in your home. It will also improve your home’s resale value because buyers see energy efficiency as a major advantage. The current statistics read that your property ascends in value by $20 for every $1 you save on your utility bills when you use solar power as part of your electrical systems.
Other savings come from utility company rebates, property tax credits, and state tax credits.
Be aware that when claiming state tax credits, you may not be able to claim the Federal equivalent as well. Make sure you look up the guidelines first.
No matter what happens, residential property tax credits are available until 2021. But you should be aware that the value of the credit will decrease each year. So, if you act quickly, you’ll make bigger savings.
Political murmurings coming out of Washington also point towards the renewal of many of the credits that expired back in 2017.
When you add up all the costs of installation and the potential 30% tax break, you can get a big return on your next tax bill. And that’s before we start to consider the other state tax breaks and any rebates you may be entitled to from your utility company.
How to Claim Residential Energy Tax Credits
H&R Block Online Tax Filing provides you with step by step instructions to insure that you claim every tax deduction and energy credit that you are eligible for. H&R Block also insures that you get the largest refund possible. Their online filing services can import your W2 information into your tax return so you can avoid for your tax forms to come in the mail.