The Inflation Reduction Act (IRA) expands energy efficient home improvement tax credits
Historically, the credit had a lifetime cap of $500 ($200 for windows), which was based on 10% of the cost of eligible property. The percentage of the credit went from 10% to 30% of the cost of the:
o Amount paid or incurred by the taxpayer for qualified energy efficient home improvements* installed during such taxable year; and
o The amount of the residential energy property* expenditures paid or incurred by the taxpayer during such taxable year.
The IRA replaced the $500 lifetime cap on the credit with a $1,200 annual credit limitation. The credit cap is further limited annually to:
o $600 per any one item of qualified energy property;
o $600 with respect to all exterior windows and skylights;
o $250 with respect to any exterior door; and
o $500 in the aggregate for all exterior doors;
However, the annual cap is increased to $2,000 for the following purchases of specified residential energy property:
o Electric or natural gas heat pump water heater;
o Electric or natural gas heat pump; and
o Qualified biomass stove or boiler as defined in IRC §25C(d)(2)(B)
All items placed in service after 2024 for which the credit is claimed to be produced by a qualified manufacturer, and a qualified product identification number must be provided on the tax return filed by the taxpayer. A qualified manufacturer is a manufacturer of property for which the credit can be claimed (other than insulation) that enters into an agreement with the Secretary of the Treasury to assign and label such property with a unique identifying number and provide written reports to the secretary listing such unique product identification numbers.
As before there is no carryover of unused credits. Unused credits are simply lost, so this increased credit may provide minimal or no tax benefit for taxpayers with low or no income tax liability.
* Energy efficient home improvements: any insulation material or system, including air sealing material or system; exterior windows, including skylights; and exterior doors.
* Residential energy property: an electric or natural gas heat pump water heater; an electric or natural gas heat pump; a central air conditioner; a natural gas, propane, or oil water heater; a qualified biomass stove or boiler; and any improvement to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders.