If you are considering making home upgrades as the year comes to a close, delaying them until 2023 may provide tax benefits.
Nonbusiness Energy Property Credit
Taxpayers may be eligible for the Nonbusiness Energy Property Credit, which is a credit equal to the sum of 1) 10% of the cost of qualified energy efficiency improvements and 2) the amount of residential energy property expenditures, up to certain dollar limits, for property put into service before January 1, 2023.
Given that this credit has a $500 lifetime cap, it’s probable that many taxpayers have already claimed the whole $500 in the past year (s).
Energy Efficient Home Improvement Credit
However, this credit is renamed the Energy Efficient Home Improvement Credit as of 2023. This credit is a yearly deduction worth 30% of the total of the following costs:
- The cost of qualified energy efficiency improvements (defined below) installed during the tax year;
- The cost of residential energy property expenditures (defined below) paid or incurred during the tax year; and
- The cost of home energy audits installed during the tax year.
The Energy Efficient Home Improvement Credit is subject to the following limitations:
- $1,200 per taxpayer per year
- $600 for residential energy property expenditures, windows, and skylights
- $250 for any exterior door ($500 total for all exterior doors)
- $150 for a home energy audit
Notwithstanding these limitations, a $2,000 annual limit applies to the cost of specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
What is a Qualified Energy Efficiency Improvement?
A “qualified energy efficiency improvement” is an energy-efficient building envelope component that meets all of the following requirements:
- The component is installed in or on a unit located in the U.S. that is owned and used as the principal residence of the taxpayer.
The original use of the component begins with the taxpayer (component was not previously used).
The component is reasonably expected to remain in use for at least five years. - The building envelope component is considered energy efficient if it is specifically and primarily designed to reduce the dwelling unit’s heat loss or gain when installed.
- The component also needs to meet the prescriptive criteria for that component established by the most recent International Energy Conservation Code (IECC) standard in effect as of the beginning of the calendar year that is two years before the calendar year in which the component is placed in service.
Examples of potential qualifying components include:
- Insulation material or systems
- Exterior windows
- Skylights
- Doors
What is a Residential Energy Property Expenditure?
“Residential energy property expenditures” are expenditures for qualified energy property tax that are:
Installed on or in connection with a dwelling unit located in the U.S. and used as a residence by the taxpayer (does not have to be the principal residence) and
Originally placed in service by the taxpayer
Qualified energy property includes any of the following items that meet the highest efficiency tier established by the Consortium for Energy Efficiency in effect as of the beginning of the calendar year in which the property is placed in service:
- An electric or natural gas heat pump water heater
- A central air conditioner
- A natural gas, propane, or oil water heater
- A natural gas, propane, or oil furnace or hot water boiler
- A biomass stove or boiler that has a thermal efficiency rating of at least 75%
- An oil furnace or hot water boiler that (if placed in service between 12/31/22 and 1/1/27) meets the 2021 energy star efficiency criteria
The term “residential energy property expenditures” includes expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property.
