Improving a home’s energy efficiency has always been a solid money-saving idea, and a slew of super-sized US tax credits that take effect this year will help many taxpayers with the initial costs.
In 2022 there was a $500 lifetime limit on the federal energy efficient home improvement credit. Now, it’s worth up to $1,200 yearly.
As before, it’s what’s known as a non-refundable tax credit. That means it can be used to reduce the federal income tax one owes, but if the credit is worth more than the tax owed you don’t get a check for the difference. So, if you don’t owe federal income tax — as is the case with many retirees — it won’t be of any help.
The credit was greatly increased under the Inflation Reduction Act, the nation’s largest-ever investment in fighting climate change. There are actually multiple tax credits, and some of the rules are still being sorted out, such as for new and used electric vehicle purchases.
But, we already know a lot, and what’s known could help homeowners plan out money-saving improvements in a way that maximizes the federal tax credits.
For example, there are different tax credit limits for different improvements; up to $600 for windows and skylights, up to $500 for doors, and 30 percent of the costs (including labor) for electric or natural gas heat pumps. In each case, energy efficiency standards apply, such as Energy Star ratings.
Doing different improvements in different calendar years would make it more likely that one could get the maximum tax credits without hitting the $1,200-per-year cap. Some improvements, such as heat-pump water heaters, have credits (up to $2,000) that can be claimed separately, on top of the $1,200 for other things.
TIP: Utility companies typically offer incentives or rebates for purchasing energy efficient water heaters and heating-and-cooling systems, so check with yours. Those incentives are in addition to the federal tax credits.
As always, the energy efficiency project that typically saves the most while costing the least is improving home insulation. The tax credit will cover 30 percent of the cost.
For homeowners interested in installing solar panels, the federal tax credit was supposed to drop to 22 percent of the cost this year, and expire in 2024. Instead it was increased to 30 percent (with no dollar maximum), retroactive to the start of 2022 .Battery storage systems will count, as well.
Federal tax credits for homeowners who install solar panels increased when President Joe Biden signed the Inflation Reduction Act into law in August. Files/AP
South Carolina offers a state income tax credit worth 25 percent of the cost, which can only be claimed for up to $3,500 per year, over multiple years. Used to full advantage — which depends on tax liability — the state and federal incentives could now cover 55 percent of the cost of solar panels.
Not sure which improvements would make the most sense? There’s a tax credit of up to $150 (based on 30 percent of the cost) for getting a home energy audit. TIP: Some utilities offer them for free.
This is not a comprehensive list, and there’s more to come.
Some initiatives — the high-efficiency electric home rebate program and the home energy performance-based, whole house rebates — are still in the rulemaking process and will also depend on state actions. More than $137 million is coming to South Carolina for those initiatives.
For a typical home owner who wants to do some common things — better insulation, new windows, a new HVAC system — the takeaway is that they can get generous credits against their federal income tax liability. And spreading big projects over multiple years could maximize those tax credits.
reach David Slades at 843-937-5552. Follow him on Twitter @DSladeNews.