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Recent Tax Updates

2023 Energy Efficient Home Improvement Credit

Energy Efficient Home Improvement Credit.

Energy Efficient Home Improvement Credit

Included in the Inflation Reduction Act of 2022 was the Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit).

Is the Energy Efficient Home Improvement Credit Refundable?

Taxpayers that make qualified energy-efficient improvements to their existing home in 2023 can qualify for a nonrefundable tax credit of up to $3,200 depending on what type of improvements they make to their primary residence.

Business Use of Home

If a taxpayer uses their home partly for business the amount of the credit is calculated as follows:

  • Full Credit if home is used 20% or less for business
  • Credit is based on share of expenses allocable to nonbusiness use if home is used for more than 20% for business.

What Qualifies for the Energy Efficient Home Improvement Credit?

To qualify, home improvements must meet energy efficiency standards. They must be new systems and materials, not used. Some improvements have specific credit limits as follows.

Heat Pumps and Biomass Stoves and Boilers

For heat pumps, biomass stoves and biomass boilers the credit is 30% of their cost up to a limit of $2,000 per year. In order to qualify these items must have a thermal efficiency rating of at least 75%. The costs may include labor for installation

Other Qualified Energy Efficiency Improvements and Residential Energy Expenses

The credit is 30% of the cost of qualified energy efficiency improvements and residential energy expenses up to a limit of $1,200 per year.

The following types of improvements or residential energy expenses (the total credit for all cannot exceed $1,200) qualify for the credit:

  • Exterior doors that meet Energy Star requirements. Credit is limited to $250 per door and maximum credit for doors in $500.
  • Exterior windows and skylights that meet Energy Star Most Efficient certification requirements. Maximum credit for qualified windows is $600 per year.
  • Insulation and air sealing materials or systems qualify as long as they meet International Energy Conservation Code standards at the start of the year 2 years before installation. Only the materials qualify for the credit. There is no maximum limit for insulation other than the total for all qualifying improvements of $1,200.
  • Residential energy property that meets the Consortium for Energy Efficiency highest efficiency tier qualifies for the credit with a maximum credit allowed each year of $600.

Qualified property includes the following:

  • Central air conditioners
    • Natural gas, propane, or oil water heaters
    • Natural gas, propane, or oil furnaces and hot water boilers
    • Costs of electrical components such as panel boards, sub-panel boards, branch circuits and feeders needed to support the residential energy property qualifies if they meet the National Electric Code and have a capacity of 200 amps of more.
  • Allows a credit of 30% of the cost for a home energy audit up to $150.

The audit must identify the most significant and cost-effective energy efficiency improvements that need to be made to the residence. It must include an estimate of the energy and cost savings for each improvement. The home energy auditor must provide a written audit report to the taxpayer.

How to Claim the Energy Efficient Home Improvement Credit

File Form 5695, Residential Energy Credits Part II, with your tax return to claim the credit. You must claim the credit for the tax year when the property is installed, not merely purchased.

For more information see the following:

CrossLink Professional Tax Solutions

CrossLink Professional Tax Software

CrossLink is the industry’s leading professional tax software solution for high-volume tax businesses. Built based on the needs of busy tax offices and mobile tax preparers that specialize in providing their taxpayer clients with fast and accurate tax returns, CrossLink has been a trusted software solution since 1989. CrossLink’s in-depth tax calculations, advanced technological features, and paperless solutions allow you to prepare the most complicated tax returns with confidence and ease while providing your customers an unparalleled experience.

Mark Castro, CPA

Mark Castro, CPA

Mark has been with CrossLink Professional Tax Solutions (CPTS) since 2008, but has been in the tax industry since 1990. As the government/tax industry liaison for CPTS, Mark has been very active in working with the IRS, States, and other tax industry members to help improve communications, promote standardization, and simplification of eFile systems. Mark has also been active with industry associations as a board member of the National Association of Computerized Processors (NACTP) and the Council of Electronic Revenue Communication Advancement (CERCA) for many years. These two associations work with the IRS and States to help solve key eFile and electronic tax system issues and work to improve the operations of the State and IRS eFile systems.

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