HVAC System Replacement

How to Earn Tax Credits for Energy Efficiency

glowing light bulb among many coins


Improving your home’s energy efficiency by upgrading air conditioning and heating equipment or installing better windows may save you more money than just on your monthly utility bill.  Under the Bipartisan Budget Act of 2018, several expired tax credits for residential energy efficiency improvements were renewed, giving homeowners a way to put more money in their pockets after an upgrade project.  In addition to “tax credits” offered by governments, some utility companies offer “rebates” for qualified upgrades.

What is the difference between a “tax credit” and a “rebate”?

A “tax credit” is a dollar-for-dollar reduction of the income tax you owe.  For example, if you owe $2,000 in federal taxes but are eligible for a $2,000 energy tax credit, your net tax liability is $0. You own no taxes.  If your tax credit is more than what you owe in taxes that year, you can roll the remaining credit over for up to 5 years. On the other hand, a “rebate” is usually in the form of a check sent directly to you, usually by your utility company, for proving that you made qualified energy improvements to your home. A rebate is not associated with your income or property taxes.

The federal government offers two tax credits to defer the costs of some home efficiency improvements: the Residential Renewable Energy Tax Credit and the Non-business Energy Property Credit.  Tax credits for non-business (residential) energy property are available retroactively to purchases made through December 31, 2017.  Tax credits for all residential renewable energy products have been extended through December 31, 2021, but include a gradual step down in the value of the credit each year after 2019.

At the completion of your upgrade project, you need to document your expenses to the IRS with your federal taxes on Form 5695.  The documentation can be complicated, so consider working with a tax professional to make sure the paperwork is submitted properly.

Residential Renewable Energy Tax Credit

This tax credit is equal to 30% of the cost of equipment and installation of residential systems that use or produce renewable energy.  Examples of eligible equipment are: solar panels for generating electricity, solar-powered water heaters for water used inside the home (not for pools), wind turbines up to 100 kW, Energy Star compliant geothermal or ground-source heat pumps, and fuel cells generating at least 0.5 kW of power.  The fuel cell tax credit is calculated at $1,000 for each kilowatt as opposed to 30% of equipment and installation. The credit can be taken for renewable energy systems in your principle residence and a second home. Fuel-cell equipment only qualifies for the principle residence.

tax credits for energy efficiencyNon-business Energy Property Credit

This credit comes in two parts.  With the first, homeowners can receive a tax credit of 10% of the cost of “qualified energy-efficient improvements”.  Improvements that qualify for this credit include adding insulation, upgrading some roofs, and installing energy efficient windows and exterior doors (including skylights).  The credit only applies towards the cost of materials and not labor or installation charges. For example, if you install a qualified roof that cost $3,000 for materials and $7,000 for labor, your tax credit is 10% of $3,000 or $300.  Labor costs under this credit are not eligible.

The second part allows homeowners to receive a tax credit for some high-efficiency heating and air conditioning systems or “residential energy property costs.”  These include heat pumps, heat pump water heaters, stoves and boilers using biomass fuel, and advanced circulating fans. The tax credit value for each item can be found at www.energystar.gov.

There are significant limits to the Non-business Energy Property Credit.  The credit is only worth a maximum of $500 for all years combined from 2006 to the present for upgrades to the homeowner’s principal residence.  Of the $500 limit, a maximum of $200 can be for windows. If you installed a qualified electrical heat pump water heater worth a tax credit of $300 and qualified propane water heater also with a $300 tax credit, you are only allowed to take a maximum of $500 for the credit, not $600.

www.energystar.gov has an excellent section listing each piece of allowable equipment, the tax credit for each item, and the required efficiency standards for each.  Before taking on an upgrade project, you and your contractor should review the Energy Star requirements to ensure your receive the largest rebate or credit possible.

State, County, and City Tax Credits and Rebates

Homeowners can also take advantage of energy efficiency incentives offered by their state, county, city, or utility company.  www.dsireusa.org is a website funded by the US Department of Energy with the most comprehensive database of tax credits and rebates for home energy improvements.

For example, North Carolina homeowners with Duke Energy as their utility provider can receive cash rebates through the Smart $aver program.  New high efficiency air conditioning systems may be eligible for up to $600 in rebates, and sealing attic spaces could net you $250. There is a specific process to get this rebate, and the work must be performed by a Duke Energy approved contractor (such as Comfort Monster).  Once the approved contractor completes the upgrade work, they will submit the rebate request to Duke Energy, and the homeowner receives a check in 4 – 6 weeks. Note that this rebate comes from the utility company and not the state or federal government.

Other incentives help homeowners reduce their annual property tax bill.  North Carolina legislation exempts 100% of the appraised value of residential solar panels from property tax.  The incentive is effective for tax years on or after July 1, 2008. See www.dsireusa.org for details on this and other state incentives.

Improving the energy efficiency of your home by upgrading windows, adding insulation, or installing high efficiency air conditioning systems keeps the home more comfortable and can reduce your monthly utility bill.  Homeowners should also take advantage of the tax credits and rebates offered for these improvements. To maximize the money coming back to you, consider working with a licensed building or air conditioning contractor to install the best equipment for your home and for your budget.