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.