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Greg Spears

I BOUGHT AN EXPENSIVE new water heater last year for my house in Maine. The old heater had a ring of rust at the bottom, and I was spurred to act by an $800 rebate offered by the state of Maine, which was contingent on buying a heat pump water heater. The new water heater draws its heat from the surrounding air, and is two-to-three times more efficient than my earlier model.

I filled out a rebate form at the appliance store counter. Months later, I got a curt email from the state of Maine saying I didn’t qualify for money back because the model I’d purchased wasn’t Energy Star rated. By then, the heater had already been installed and I didn’t want to unwind the purchase. Lesson learned: Read the fine print.

That’s good advice if you want a share of the billions in energy-efficiency tax credits contained in 2022’s Inflation Reduction Act. From now until year-end 2032, homeowners can get money back after installing energy-efficient heaters, windows, doors, air-conditioners, furnaces, water heaters and more. Although these energy-efficiency incentives could return $28 billion to taxpayers, according to an estimate from the University of Pennsylvania’s Wharton School, most taxpayers haven’t heard of them.

In past years, you may have used similar tax credits to snag a deduction for new windows and doors. In many cases, the new law is an extension of previous schemes, but with more generous allowances. Some are for energy savings, like insulation, and others are for energy creation, like solar panels.

There’s fine print you’ll need to understand to make sure you qualify, which I’ll cover in a minute. To whet your appetite, here are 10 credits that may cut your utility bills—and your taxes, too.

1. Insulation. The government will pay 30% of an insulation project’s cost, covering up to $1,200 a year with tax credits. A tax credit is a dollar-for-dollar reduction in the federal income taxes you owe. All these credits are offered annually, meaning you could stage several improvements through the years, until the credits end Dec. 31, 2032.

2. Windows and skylights. The government will pay as much as 30% of a window replacement project’s cost through tax credits worth up to $600 a year. The replacement windows must meet Energy Star’s most efficient rating, which means they’ve been tested to meet certain energy-saving standards.

3. Heat pump water heaters. You can get back 30% of the project’s cost, up to $2,000 in tax credits, for installing these energy-efficient water heaters. That credit, plus the state rebate, might pay for the entire cost of buying and installing one in Maine, but only if it meets the Energy Star efficiency rating.

4. Geothermal heat pumps. You can get a 30% tax credit on the cost of installing one of these systems that uses the ground or groundwater to heat or cool a residence. The unit must be Energy Star certified. The credit will decline to 26% of the project’s cost in 2033 and 22% in 2034.

5. Small residential wind turbines. You can get a 30% tax credit before Jan. 1, 2033, on the cost of installing a small windmill that converts wind power to electricity compatible with your home’s electrical system. The credit will decline to 26% in 2033 and 22% in 2034.

6. Solar panels and solar water heaters. Again, you can get a 30% tax credit before Jan. 1, 2033, on the cost of installing solar panels or a solar water heater. The credit will decline to 26% in 2033 and 22% in 2034. Unusually, both principal residences and second homes qualify for the solar panel and solar water heater credits. The installed water heating system must be certified by the Solar Rating and Certification Corp.

7. Electrical panel upgrade. If your fuse box needs to be juiced up to accommodate one of these new energy systems, 30% of the project’s cost, up to $600, will be refunded through a federal tax credit. The new box has to have at least 200 amps and meet the National Electric Code.

8. Home energy audit. Taxpayers can claim 30% of the cost, up to $150, in the form of a federal tax credit on a written energy audit conducted and prepared by a certified home energy auditor.

9. Battery storage. If you want a battery to capture the power created by a solar panel, windmill or similar system, you can get 30% of the cost back in a federal tax credit for installing a residential fuel cell. The credit will decline to 26% of the cost in 2033 and 22% in 2034. The unit must have a storage of at least three kilowatts, and both primary and secondary residences qualify.

10. Air source heat pumps, including mini-splits. You can get back up to 30% of the cost of an air source heat pump to heat your house, up to a maximum of $2,000 a year. The qualifying brand of heat pump varies by region. You can find details on the Energy Star website.

 There are several more credits available on central air-conditioners, boilers, furnaces and biomass fuel stoves. I frankly don’t understand the ins and outs of all these newer systems, or who they’re best suited for. I can tell you, however, to understand the fine print in the tax code before acting.

One roadblock to getting money back is that the energy tax credits are nonrefundable. You can’t receive the full credit unless you’d otherwise owe the IRS at least as much in taxes. A second limitation: The maximum tax credit a homeowner can receive for these energy improvements is $3,200 a year. You might want to stagger projects so you don’t exceed this ceiling in any one year.

The cap is lower still on specific projects like new exterior windows and skylights—30% of the cost up to a maximum of $600 a year. If you spent $2,000 on new windows in one year, you’d get the maximum annual credit, and further spending on windows that year wouldn’t garner any additional tax benefit. You might want to do one room and then call the window company back to do another room the next year. A similar credit on exterior doors is capped at $250 per door, up to a maximum of $500 annually.

Many of these credits, for such things as windows, doors and insulation, apply to your principal residence only—the place where you live most of the time. Some, such as solar panels and solar water heaters, apply to secondary homes as well, but the credit is pro-rated based on the amount of time spent there. The household energy-saver credits do not apply to rental homes.

These household energy-saver tax credits also don’t apply to places of business. If you work from home, however, you can get the full tax credit if the business use of your primary residence doesn’t exceed 20%. If it does, the credits are pro-rated.

With so many energy credits on offer, you might want to prioritize projects by their effectiveness at lowering your utility costs. Fattening the insulation batts in your attic may save you more—at far less cost—than replacing all your windows. Begin with a home energy audit to learn which projects would be most effective. You can get a tax credit of up to 30% of the cost of the audit, up to a maximum of $150.

I expect the cost of these energy-saving systems will climb as demand for them heats up. Early movers may beat price rises and also sidestep those dreaded “supply chain issues.”

Finally, to claim the credits, you must file IRS Form 5695 with your federal tax return. The government says to claim the credit for the year in which the energy-saving device is installed, not when it’s purchased.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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johnnykkynnhoj
1 year ago

Cash for Clunkers again?!!

Recent Tornado/hail damage in our area has revealed a lot about getting this type of work done.
Well known roofing company replaced our roof prior to storms. Can’t get a reply to repair damages…
Neighbors contracted with a “Storm Chaser” contractor from 100+ miles away. Roof and siding being done by Hondurans…
Hearsay about local established contractors was double price for repair work…
Let alone home improvements such as these energy use lessening one’s.

alex scott
1 year ago

the admin, calls it a carrot. i call it a tax payer funded economic cudgel. our limited government founding fathers are spinning in their graves. let the market dictate and chop off the government thumb[s] on the scale of our lives.

kt2062
1 year ago

So if you install a battery for solar panels and they cost $17,000 you will not get 30% off or $5100? You can only get $3200?

David Lancaster
1 year ago

I have been researching this program recently as we want to add central air (max $600 rebate) to our heating system. We are getting estimates then will calculate whether I can get a heat pump (max $2,000) and spend a similar amount.

One important piece of information you left out is the program at this point is scheduled to expire 12/31/32, so unless they cancel the program in the future you have time.

Also there are huge rebates available for the purchase of certain models of electric cars if you are so inclined.

JAMIE
1 year ago

Thanks so much for this article. I had missed this news and thought these tax incentives had expired. Here is the link for more info. https://www.irs.gov/credits-deductions/energy-efficient-home-improvement-credit

Jim Gary
1 year ago

Great information that I have not seen elsewhere! Thank you for taking the time to share.

Andrew Forsythe
1 year ago

Greg, thanks for this. Very timely as we just installed a new HVAC system which I think qualifies for a credit. It’s a heat pump but I guess I need to figure out if it’s an “air source heat pump”. And then I need to figure out where to enter it on Form 5695—read it 3x (and the instructions) and still don’t see it!

Nate Allen
1 year ago

Do you just keep the receipts for when filling out the form or is it all on the honor system?
(Also, is there a difference for installing yourself vs. having a contractor install it?)

Last edited 1 year ago by Nate Allen
Arnold Hold
1 year ago

Acknowledging that some of these home upgrades are energy and cost efficient, why should taxpayers be paying for this stuff? If these choices make sense, homeowners should do it on their own dime, and they’d probably still be saving money.

alex scott
1 year ago
Reply to  Arnold Hold

agreed. this is our choice, not the nanny state’s. to bribe us with other citizen”s money is abhorrent.

rayanmiller6303
1 year ago
Reply to  Arnold Hold

Because we only get one planet

alex scott
1 year ago

and it is doing just fine. spend money to innovate and mitigate,
china and india are laughing at us as they pump ever more gasses into the atmo. and when did NUCLEAR become the new ”n word”?

Will
1 year ago
Reply to  Arnold Hold

I imagine that the answer is that the new tech costs more than the old. Individuals will likely look at the install cost closer than the 30 year return and choose the old, less-efficient methods. Ergo, our government is helping push the new tech forward so we stop killing our collective selves by our individual choices.

William Perry
1 year ago

I installed a high efficient hybrid HVAC system in 2009 which operates in pure electric heat pump mode until the outside temperature falls below about 40 F when it switches over to natural gas as its fuel for heat production. I was motivated by at least three major factors for my purchase. A $1,500 tax credit was available on my $10K purchase, my very old natural gas heating system needed a new heat exchange part that was no longer available and I planned to live in my home for at least another decade.

In the decade plus I have had my new HVAC unit I believe my utility savings have more than paid for the cost of the replacement unit. Except for the cost of annual routine maintenance the only repair cost has been a nominal amount to repair the plastic cowing that the exterior fan uses to pull the air through the coils.

I think when your individual circumstances are right for making a change to a more efficient and environmentally friendly HVAC, car, etc. you can do both financially well while doing good for the environment.

Last edited 1 year ago by William Perry
Ben Rodriguez
1 year ago

Good for you for being proactive on the water heater. I found out the hard way that usually the way you find out you need a new one is there’s a giant pool of water in your basement because the bottom rusted out.

David Lancaster
1 year ago
Reply to  Ben Rodriguez

When installing a new water heater there are alarm systems that can be installed to warn of leaks

rayanmiller6303
1 year ago

They are relatively inexpensive and I have a less than 50$ set of 6 with one by all the major leak possibilities in my house.

mytimetotravel
1 year ago

Of course, I’m glad that the government is doing something about climate change. However, it does occur to me that this is another case of renters subsidizing home owners (see mortgage interest deduction).

alex scott
1 year ago
Reply to  mytimetotravel

sorry for the down votes. it’s the pure economics of price increases being passed along to the end users. surprised THIS CROWD doesn’t GROK that…

Charlie Flagg
1 year ago
Reply to  mytimetotravel

I am genuinely interested in people’s disagreement with mytime’s comment. Is her comment factually incorrect?

rayanmiller6303
1 year ago
Reply to  Charlie Flagg

It is all in how you look at it, I had a friend make the same argument about subsidizing Tesla’s (expensive cars).
I see this with insurance for the wealthy on the coast where I live in Florida.
No law or rule will be perfect and if you look you can usually find an “angle” to make it less than perfect.

Charlie Flagg
1 year ago

The merits and fairness of taxpayer-funded subsidies ostensibly designed to produce certain policy outcomes should be debated. Their efficacy should also be evaluated honestly.

But setting that aside, I am curious about the reaction to Kathy’s statement. She’s not making a policy judgement, she’s stating a fact. I guess folks don’t like their preferred subsidies examined too closely.

alex scott
1 year ago
Reply to  Charlie Flagg

it will nevwe be debated in the halls of power. they ALL love to spend other people’s money. and since they all know what is best for us, it will never stop. from either side…

rayanmiller6303
1 year ago
Reply to  Charlie Flagg

Agree, they should be debated and examined, sometimes policies can do more harm.
The way you make your statement it feels like you are saying that is the only fact about the policy to be considered, I am going to assume that is not your intent?

Personally I think Kathy makes a good point, but there are many points to be made, hers is one of many. For the policy to be worthwhile some like Kathy’s must be outweighed by others that do “more good”. Of course the ranking and weighting of such points is in the end judgmental and subject to our Biases.
For me a little subsidy and possible “un fairness” is worth saving the planet.

alex scott
1 year ago

…but the point is, who makes you, or me, the arbiter?
so much room for debate, but both sides, ”take the money and run” i would like to have congressioanal debates, but i know it will never happen. the best i can do [on a personal level] is to take my tax dollars off the table.
for me, that means off grid, homestead. more people are doing it every day. i am happy to join their ranks.

Jonathan Clements
Admin
1 year ago
Reply to  Charlie Flagg

This is way beyond HD’s mandate, but I suspect it would be awfully hard to figure out who is subsidizing who when it comes to government spending and taxes. Do the rich subsidize the poor–or do the poor subsidize the rich because the government makes possible an economic system that benefits the rich? Do those without guns subsidize those with guns, because of the necessity of more police and greater safety measures? Do those who take public transport subsidize those who drive cars, because the latter don’t pay the full cost of the environmental damage and of building and policing roads? Do those who smoke subsidize nonsmokers, because they pay huge sales taxes while ultimately getting less from Social Security and Medicare? There are countless thorny questions involved–and, in exploring the answers, there’s the potential to offend almost everybody!

Charlie Flagg
1 year ago

Fair enough.

rayanmiller6303
1 year ago

Deep Jonathan, thanks, said it much better than I could even begin to.

Will
1 year ago
Reply to  Charlie Flagg

I saw that she had 3 down-votes. Homeowners, I suspect. Her point seems valid: renters pay their own utilities and benefit from lower utility bills. The apt building owner, in this case, has no short-term gain and slight long-term gain from this program. If the program designers had renters in mind (and there are a lot of renters in this country–but not me). they would have fiddled with the rules to help all.

David Golden
1 year ago
Reply to  mytimetotravel

The US tax code is riddled with perverse incentives and unfair subsidies. We could spend a lifetime listing them all. Long ago, I gave up trying.

alex scott
1 year ago
Reply to  David Golden

best to walk. we just end up with a scar from beating our heads against a brick wall. ”the weak give up and stay, the strong give up and go.”

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