All About the New Energy Efficient Home Improvement Credit for Tax Years Beginning in 2023

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Prior to 2022, the federal “Nonbusiness Energy Credit” allowed for a lifetime tax credit of a maximum of $500 for installation of certain energy-efficient exterior doors, windows, skylights, certain roofs and insulation. It also could be used for the purchase of certain central air conditioners, electric heat pumps, gas water heaters and certain other appliances.

The property must be installed in your personal residence and the credit was based on 10% of the cost of the purchases. There were additional credit limits of $200 for exterior windows and skylights, $300 for heat pumps, central AC and water heaters, $150 for furnaces and boilers and $50 for qualified main air-circulating fans. This credit was extended through 2022 and is claimed on Form 5695, filed with your federal tax return.

The Inflation Reduction Act of 2022 brought dramatic changes to this tax credit and renamed it the Energy Efficient Home Improvement Credit (let’s call it EEHIC). Instead of a $500 lifetime cap, there’s a $1200 ANNUAL cap, and the credit is based on 30% of the purchase price, increased from 10%. Additionally, there is a separate $2,000 per year cap allowed for qualified heat pumps and heat pump water heaters, biomass stoves and boilers.

EEHIC covers two main categories of purchases - Energy Efficient Home Improvements and Residential Energy Property.

Energy Efficient Home Improvements include insulation materials, exterior windows, including skylights, and exterior doors that meet certain Energy Star requirements.

Residential Energy Property covered by EEHIC must meet or exceed certain high-efficiency standards and includes the following:

  • Electric or natural gas heat pumps and heat pump water heaters

  • Central air conditioners

  • Natural gas, propane or oil water heaters, furnaces and hot water heaters

  • Biomass stoves or boilers, oil furnaces and hot water boilers

  • Improvements to or replacements of panelboards, sub-panelboards, branch circuits or feeders with a load capacity of 200 amps or more

What efficiency standards must be met? Here are some examples:

  • Natural gas water heaters: ENERGY STAR certified models > 0.81 UEF (Uniform Energy Factor) for tanks less than 55 gallons and > 0.86 UEF for tanks greater than or equal to 55 gallons.

  • Tankless gas water heaters: ENERGY STAR models with > 0.95 UEF are eligible. 

  • Exterior windows and skylights: Must meet ENERGY STAR “Most Efficient” criteria. See www.energystar.gov/products/most_efficient

Home Energy Audits are another new category included in the EEHIC. This is an inspection and written report by a certified auditor that identifies energy efficiency improvements, including an estimate of energy and cost savings.

In addition to the annual $1200 and $2000 tax credit caps mentioned above, there are additional annual caps as follows:

  • $250 cap on each exterior door, up to a total of $500 per year

  • $600 annual cap on exterior windows and skylights

  • $150 annual cap on home energy audits

  • $600 annual cap on each Residential Energy Property item

How is the cost determined? Does it include installation? The cost of Energy Efficient Home Improvements (e.g. insulation, windows, doors) DO NOT include labor. Residential Energy Property (e.g. water heaters, central air, heat pumps), DO include the cost of labor. See IRS FAQs at THIS LINK posted 12/22/22 for more details.

How long is EEHIC in place? From 2023 through 2032 (at the current time).

Does EEHIC apply only to my primary residence? Yes for Energy Efficient Home Improvements (again - insulation, windows and doors). For Residential Energy Property, it can be in any U.S. home owned by the taxpayer.

Is the EEHIC carried to future years if I can’t use it? No. If your taxes are lower than the credit, lucky you! But no, any unused credit is not carried forward to future year tax returns.

How do you claim the EEHIC? Form 5695, filed with your federal tax return. Starting in the 2024 tax return, taxpayers will need to provide the qualified product identification number for any items purchased

Confused? Yes, so am I. But with this summary, your own research, dealers/retailers and your CPA, you’ll get this nailed down and take advantage of these new tax credits.

For a nine page IRS Fact Sheet about the Energy Efficient Home Improvement Credit as well as the Residential Clean Energy Property Credit (e.g. solar credit, which is back to 30% from 2022 through 2032, then 26% in 2033 and 22% in 2034), visit www.irs.gov/pub/taxpros/fs-2022-40.pdf.

Learn more about Energy Star qualified products at www.energystar.gov/about/federal_tax_credits/non_business_energy_property_tax_credits.

One example of how to maximize the credit. Let’s say you’d like to replace 20 exterior windows on your home. The windows cost $400 apiece, excluding labor. If you install them all in one year, the cost would be $8,000 plus installation. $8,000 times 30% equals $2400, but your EEHIC is limited to $600, for a net cost of $7,400 plus installation. If you want to maximize the credit, you could buy 5 windows a year for 4 years at a cost of $2,000 per year, plus installation (ignoring inflation). By stretching the purchase over 4 years, you increase the tax credit from $600 to $2,400, for a net cost of $5,400 plus installation. Something to think about.

My Practical Experience

So I went to Home Depot to look for windows and water heaters that are qualified for EEHIC. I found a couple water heaters that met the requirements but the windows I had no clue which one did. So I thought, maybe I could figure it out by going back to the IRS Q&As at THIS LINK, which had a link to the ENERGY STAR website. So I entered my local zip code, which took me to a list of tax credits by product type at THIS PAGE. So I clicked Windows & Skylights Tax Credit at THIS PAGE. Then I clicked “Find Eligible Products” at THIS PAGE. Under Building Products I found the Windows, Door & Skylights category, which had a link to a “NFRC Directory” at THIS PAGE, where there are links to searches by region for the National Fenestration Rating Council. There’s no definition of what is in each region. So I guessed the Southern region, which I searched by product type, like Single and Double Hung Windows. From there, I saw a list of “Energy Star Partner” names. I picked Milgard, which then gave me a list of Milgard product lines that I’m going to assume meet the ENERGY STAR “most efficient” requirement (though it doesn’t clearly state that anywhere). So where do I buy these theoretically qualifying products? The site didn’t tell me. Bottom line: You’re probably going to have to just ask the retailer which products meet the IRS requirements as the IRS has not made this process easy.