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What Is an Energy Tax Credit?

Energy tax credits can help you reduce your property's energy bills, improve its environmental footprint, and lower your tax burden.


[Updated: Mar 02, 2021 ] Jun 26, 2020 by Aly J. Yale
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Making your property more energy efficient comes with endless benefits. Your electricity, gas, and water bills are lower, you help the environment, and you might even lower your annual tax burden in the process.

That last one is thanks to a number of federal energy tax credits which lower your tax bill dollar for dollar if you make certain energy improvements on your home.

Want to improve your property's environmental footprint while lowering your tax liability in one fell swoop? Here's what you need to know about federal energy tax credits.

Renewable energy tax credits

The renewable energy tax credit is one of two federal credits available to residential property owners. To be eligible, you'll need to install a renewable energy system in the home -- either a geothermal heat pump, a small wind turbine, a solar panel system, a solar water heater, or fuel cells.

The property you're updating must also be either your primary residence or second home. Rental properties don't qualify for this one.

The exact credit you'll get will depend on when the system is installed. For systems installed in 2019 or earlier, you'll get a 30% credit (30% of the system's cost). For those installed in 2020, you get 26%, and for those in 2021, the credit goes down to 22%. Installation costs are included here.

Nonbusiness energy property tax credits

The nonbusiness energy tax credit is another way to lower your tax burden through eco-friendly home improvements. This one rewards you for installing energy-efficient systems, appliances, and other home features with a total credit worth 10% of the upgrade's costs (up to $500).

This credit is only for use on primary residences and cannot be used on new construction properties or rentals.

Improvement Tax credit Other details
Geothermal heat pumps 30% of costs if installed by Dec. 31, 2019
26% of costs if installed by Dec. 31, 2020
22% of costs if installed by Dec. 31, 2021
Must meet Energy Star requirements
Includes installation costs
Small wind turbines 30% of costs if installed by Dec. 31, 2019
26% of costs if installed by Dec. 31, 2020
22% of costs if installed by Dec. 31, 2021
Must generate 100 kw of electricity or less
Includes installation costs
Solar water heaters 30% of costs if installed by Dec. 31, 2019
26% of costs if installed by Dec. 31, 2020
22% of costs if installed by Dec. 31, 2021
At least half the energy generated must come from the sun
Cannot be used for pools or hot tubs
Includes installation costs
Solar energy systems 30% of costs if installed by Dec. 31, 2019
26% of costs if installed by Dec. 31, 2020
22% of costs if installed by Dec. 31, 2021
Must meet fire and electrical code
Includes installation costs
Fuel cells 30% of costs if installed by Dec. 31, 2019
26% of costs if installed by Dec. 31, 2020
22% of costs if installed by Dec. 31, 2021
Up to $500 per half-kw of power capacity
Includes installation costs
Air source heat pumps $300 Must be an Energy Star-certified system
Central air conditioning $300 Must be an Energy Star-certified system
Hot water boiler (gas, propane, or oil) $150 Must be an Energy Star-certified system
Furnaces and fans (gas, propane, or oil) $150 Must be an Energy Star-certified system
Water heaters (gas, propane, or oil) $300 Must be an Energy Star-certified system
Must have a thermal efficiency of at least 90%
Electric pump water heater $300 Must be an Energy Star-certified system
Advanced main air circulating fan $50 Must be an Energy Star-certified system
Must use no more than 2% of the furnace’s total energy
Biomass stoves $300 Must be an Energy Star-certified system
Must have a thermal efficiency rating of at least 75%
Insulation 10% of cost, up to $500 Does not include installation
Roofing (metal or asphalt) 10% of cost, up to $500 Must be an Energy Star-certified system Does not include installation
Windows, doors, and skylights 10% of cost, up to $500 (up to $200 for windows) Must be an Energy Star-certified system
Does not include installation

Claiming your tax credits

To claim your energy tax credits, you'll need to file a Form 5695 along with your annual return. Though this form can be downloaded online, you may want to work with a qualified tax professional to ensure you're filing properly.

What the tax credit means for you

Some of these energy-saving projects can be expensive. Your average solar system, for example, clocks in between $16,000 and $21,000. And a geothermal heat pump? That can go up to almost $13,000.

Tax credits can help offset these high costs and make them more worthwhile. This is especially true if you plan to own the home for a long period of time (and really take advantage of those energy bill savings).

Other money-saving options

The two federal energy tax credits aren't the only money-saving options you have when making eco-friendly upgrades to your property. Many states, cities, and municipalities have their own programs that reward local residents for going green. These often include rebates, sales tax exemptions, and more.

In some cases, your water district or electric company may even offer a rebate for certain energy improvements. Again, these vary by location. You can check the database at the Clean Energy Technology Center for information on programs in your area.

You can also opt to replace your existing appliances with Energy-Star-rated ones. These can cut down on your home's energy consumption by up to 30%, saving you significantly on your water, electricity, and gas bills.

The bottom line

Improving your home's energy efficiency is always smart. But with the federal tax credit and various rebate programs that are currently available, it's an even wiser investment of your time and money.

Just make sure you work with a qualified tax professional, and if you're considering leveraging the nonbusiness tax credit, you might think about acting fast. The program has been allowed to expire several times over the last few years. Though it was retroactively extended through the end of 2020, that doesn't mean it will be revived again next year. You may want to pull the trigger soon just in case.

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