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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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