Home Improvements and Residential Energy Tax Credits
Tax Credits Are Available for Energy-Efficient Home Improvements
Homeowners may qualify for a federal tax credit for making improvements or installing appliances designed to boost the energy efficiency of a home. For example, equipment for solar, wind, geothermal, and fuel cell technology would be eligible.
For the 2018 tax year, under the federal government's Nonbusiness Energy Property Credit, the credits are good through 2019 and are then reduced each year until the end of 2021. To claim the credits, file Form 5695 with your tax return.
Energy Star Products
Energy Star products, which boast 30 percent less energy usage, are eligible for tax credits. The requirements for the residential energy tax credits vary for each year that the credit is available.
Home Improvements and the Residential Energy Efficiency Property Credit
This tax credit is 30 percent of the cost of alternative energy equipment installed on or in a home, and it includes the cost of installation. Solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property are examples of equipment eligible for the tax credit. There is no dollar limit on the credit for most types of property and, if the credit is more than the tax owed, the unused portion can be credited to next year’s tax return.
While the home must be located in the United States, it does not have to be the taxpayer’s main home unless the alternative energy equipment is qualified fuel cell property. Both existing homes and homes under construction are eligible.
The credit for solar electric property and solar water heating property is extended for improvements made through December 31, 2021. The credit for expenditures made for qualified fuel cell property was available for property placed in service through December 31, 2016.
Non-business Energy Property Credit
The first part of this credit is worth 10 percent of the cost of qualified energy-saving equipment or items added to a taxpayer’s main home in the past year. For example, energy-efficient exterior windows and doors, certain roofs, and adding insulation. However, the cost of installation is not included.
The second part of the credit is not a percentage of the cost but includes the installation costs of some high-efficiency heating and air-conditioning systems, water heaters, and biomass fuel stoves. Different types of property have a different dollar limit.
According to the IRS, the credit has a maximum lifetime limit of $500. To qualify for the credit, the main home must be located in the United States, and the non-business energy property credit is only available for existing homes not homes under construction. The taxpayer will need written certification from the manufacturer that a product qualifies for the tax credit, which is typically found on the manufacturer's website or in the product’s packaging. Taxpayers should not attach it to their tax return but file it with tax records.
Energy Tax Credits Reduce Your Cost Basis
You must reduce the cost basis of your home by the dollar amount you claim for the residential energy tax credits. The IRS explains in Publication 523: "Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures."
Energy Credits Tax Forms and Instructions
- IRS Form 5695 (PDF, includes instructions)
- Summary of Tax Incentives from the Energy Star Website