As part of the Inflation Reduction Act, Congress recently extended and expanded what was previously known as the Non-Business Energy Property Credit. The credit, now known as the Energy Efficient Home Improvement Credit, is intended to encourage investment in energy related home improvements such as energy efficiency improvements, residential energy property expenditures, and home energy audits. Prior to 2022, this credit was considered a lifetime credit. In other words, each year a 10% credit was allowed on qualifying expenses until the taxpayer reached a cumulative maximum amount of $500. This credit had originally expired as of December 31, 2021, but the Inflation Reduction Act extended it through the end of 2022.

Then, starting in 2023, the Inflation Reduction Act makes several substantial changes to the credit. The first is by removing the $500 lifetime cap limitation and replacing it with an annual limitation of $1,200. In addition, the former 10% credit percentage has been increased to a credit of 30% of qualifying expenses up to the $1,200 annual limitation. Qualifying expenses include water heaters, heat pumps, central air conditioners, hot water boilers, biomass stoves, oil furnaces, air sealing, cost of home energy audits, and electrical panels. There is an annual limit of $600 of credits with respect to residential energy property expenditures, windows and skylights, and $250 for any exterior door ($500 in total for all exterior doors). Also, the annual credit is increased to up to $2,000 for specified heat pumps and biomass stoves. Finally, roofs and advanced main air circulating fans are ineligible for the credit.

It is important to note that starting in 2025, reporting requirements mandate that manufacturers label, and taxpayers report, a product identification number associated with specified property items to receive the credit. These changes are expected to provide an incentive for taxpayers to lessen the high costs of energy and save in utility bills in addition to decreasing their overall tax liability.

If you have any questions on how you can utilize this credit or whether you qualify, give us a call at (401) 921-2000, or fill out our online contact us form.