Is there a credit for installing energy-efficient appliances or solar panels in my home?

by | May 9, 2025 | Individual Taxes, Tax Credits

Here’s what HIVE AI had to say about “Is there a credit for installing energy-efficient appliances or solar panels in my home?”:

Tax Credits for Energy-Efficient Appliances and Solar Panels

Yes, there are several valuable tax credits available for installing energy-efficient appliances and solar panels in your home. These credits fall into two main categories: the Energy Efficient Home Improvement Credit (Section 25C) and the Residential Clean Energy Credit (Section 25D).

Energy Efficient Home Improvement Credit (Section 25C)

The Energy Efficient Home Improvement Credit provides a tax credit for making energy-efficient improvements to your existing home.

Credit Amount and Limits

  • For 2023 through 2032, the credit is 30% of qualified expenses with annual limits that vary by improvement type IRS – Home energy tax credits
  • For 2023 and later, the allowable credit is 30% of the amount paid for qualified energy efficiency improvements, generally limited to $1,200 annually. There is a separate annual limit of $2,000 for qualified expenditures for heat pumps, heat pump water heaters, and biomass stoves and boilers. Therefore, the total annual credit is limited to $3,200. There is no lifetime limit.

Specifically, the credit is limited as follows:

  • Energy property – any item of qualified energy property is limited to $600
  • Windows – total of all exterior windows and skylights is limited to $600
  • Doors – any exterior door is limited to $250, total of all exterior doors is limited to $500
  • Heat pump and heat pump water heaters; biomass stoves and boilers – total is limited to $2,000
  • Home energy audits – limited to $150 IRS IRM 21.6.3 Credits

Qualifying Improvements

The credit is available for costs related to items such as high efficiency heating and cooling systems, water heaters, windows, doors and insulation. IRS IRM 21.6.3 Credits Specifically, qualifying improvements include:

The credit equals 30 percent of: (1) the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during such taxable year, (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year, and (3) the amount paid or incurred by the taxpayer during the taxable year for home energy audits. IRC § 25C(a)

Qualified Energy Property includes: (1) An electric heat pump water heater that meets efficiency standards (2) An electric heat pump with specified efficiency ratings (3) Closed loop geothermal heat pumps (4) Open loop geothermal heat pumps (5) Direct expansion geothermal heat pumps (6) High-efficiency central air conditioners (7) Energy-efficient natural gas, propane, or oil water heaters (8) High-efficiency natural gas, propane, or oil furnaces or hot water boilers (9) Energy-efficient fans used in natural gas, propane, or oil furnaces Notice 2006-26

These expenses may qualify if they meet requirements detailed on energy.gov:

  • Exterior doors, windows, skylights and insulation materials
  • Central air conditioners, water heaters, furnaces, boilers and heat pumps
  • Biomass stoves and boilers
  • Home energy audits IRS – Home energy tax credits

Requirements

To claim the credit, the improvements must be installed in or on a dwelling unit located in the United States, and at the time of installation, the dwelling unit must be owned and used by the taxpayer as the taxpayer’s principal residence. Thus, the credit is only available for existing homes. Notice 2009-53

Landlords must also be residents of the dwelling to claim this credit. IRS – Publication 5886-B: Clean Energy Efficiency Incentives and Residential Real Estate Properties

Residential Clean Energy Credit (Section 25D)

The Residential Clean Energy Credit provides a more generous tax credit for installing renewable energy systems in your home.

Credit Amount

In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the applicable percentages of: (1) qualified solar electric property expenditures, (2) qualified solar water heating property expenditures, (3) qualified fuel cell property expenditures, (4) qualified small wind energy property expenditures, (5) qualified geothermal heat pump property expenditures, and (6) qualified battery storage technology expenditures IRC § 25D(a)

The credit is available for qualifying expenditures incurred for installing new clean energy property in an existing home or for a newly constructed home. This credit has no annual or lifetime dollar limit except for fuel cell property. Taxpayers can claim this credit each tax year they install eligible property until the credit begins to phase out in 2033. This is a nonrefundable credit, which means the credit amount received cannot exceed the amount owed in tax. Taxpayers can carry forward excess unused credit and apply it to any tax owed in future years. IRS Newsroom – IR-2023-97

Qualifying Systems

This credit applies to the purchase of residential clean energy equipment, including battery storage with a capacity of at least 3 kWh. These expenses may qualify if they meet certain energy efficiency requirements:

Battery storage technology must have a capacity of at least 3 kilowatt hours. IRS Newsroom – IR-2023-97

Documentation Requirements

For the Section 25D credit, a taxpayer may rely on a manufacturer’s certification in determining whether property is eligible for the credit. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers must maintain such books and records as are sufficient to establish the entitlement to, and amount of, any credit claimed. Accordingly, a taxpayer claiming a credit for residential energy efficient property should retain the certification statement as part of the taxpayer’s records. Dawson U.S. Tax Court Opinions: Christopher John Totten

When it is time to file a tax return, taxpayers can use Form 5695, Residential Energy Credits, to claim the credit. This credit must be claimed for the tax year when the property is installed, not just purchased. IRS Newsroom – IR-2023-97

Credit for Builders of Energy-Efficient Homes (Section 45L)

If you’re building a new home or purchasing a newly built energy-efficient home, there’s a separate credit that may apply:

Section 45L provides a credit to an eligible contractor who constructs a qualified energy efficient home. For qualified energy efficient homes (other than manufactured homes), the amount of the credit is $2,000. A dwelling unit qualifies for the credit if: (1) It is located in the United States; (2) Its construction is substantially completed after August 8, 2005; (3) It meets the energy saving requirements of § 45L(c)(1); and (4) It is acquired from the eligible contractor after December 31, 2005, and before January 1, 2009, for use as a residence. Notice 2008-35

For homes acquired in 2023 through 2032: The credit amount is up to $5,000 based on the applicable program and program requirements under which the home was built (Energy Star or Zero Energy Ready Home). For homes acquired before 2023: The credit amount is $1,000 or $2,000, depending on the energy saving requirements met. IRS – Credit for builders of new energy-efficient homes

Business Energy Investment Tax Credit (Section 48)

If you use part of your home for business or have rental property, you might qualify for the Business Energy Investment Tax Credit:

Section 48 allows an “energy credit” equal to 30% of the taxpayer’s basis in certain “energy property,” defined to include “equipment which uses solar energy to generate electricity.” However, property qualifies as “energy property” only if (among other things) it is property “with respect to which depreciation (or amortization in lieu of depreciation) is allowable.” Dawson U.S. Tax Court Opinions: Preston Olsen & Elizabeth Olsen

Important Considerations

  • Installation Timing: The credit must be claimed for the tax year when the property is installed, not just purchased. IRS Newsroom – IR-2023-97
  • Documentation: Keep all receipts, manufacturer certifications, and other documentation related to your energy-efficient purchases and installations.
  • Form Requirements: Use Form 5695, Residential Energy Credits, to claim these credits on your tax return. IRS Newsroom – IR-2023-97
  • Credit Limitations: Remember that these are nonrefundable credits, meaning they can reduce your tax liability to zero but won’t result in a refund beyond that. However, excess unused credit can be carried forward to future tax years. IRS Newsroom – IR-2023-97
  • Principal Residence Requirement: For the Energy Efficient Home Improvement Credit (25C), the improvements must be installed in your principal residence. Notice 2009-53 The Residential Clean Energy Credit (25D) has more flexibility.

Conclusion

These tax credits provide significant financial incentives for making your home more energy-efficient and environmentally friendly. The Energy Efficient Home Improvement Credit (25C) can help offset the cost of energy-efficient appliances and home improvements, while the Residential Clean Energy Credit (25D) provides a substantial credit for solar panels and other renewable energy systems.

Before making any purchases, it’s advisable to check the most current requirements on the IRS website or consult with a tax professional to ensure your planned improvements will qualify for these credits.

Sources:

  • Internal Revenue Code Sections 25C, 25D, 45L, and 48
  • IRS Notices and Publications
  • Tax Court Opinions

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