Residential Energy Tax Credits: Changes in 2023

Residential Energy Tax Credits: Changes in 2023

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INSIGHTi

Residential Energy Tax Credits: Changes in
2023
November 21, 2022
P.L. 117-169, commonly referred to as the Inflation Reduction Act of 2022 (IRA), expanded and extended
two nonrefundable tax credits meant to encourage individuals to invest in energy efficiency improvements
or clean energy in their homes:
1. the energy efficient home improvement credit (previously known as the tax credit for
nonbusiness energy property, Internal Revenue Code [IRC] Section 25C), which
subsidizes certain investments that reduce energy consumption in homes; and
2. the residential energy tax credit (previously, the energy efficient property credit, IRC
Section 25D), which subsidizes investments in renewable energy production at taxpayers’
residences.
The IRA also created two grants for states to establish rebate programs to subsidize expenses similar to
those covered by these credits—the HOMES rebate program and the high-efficiency electric home rebate
program. These state programs are not yet operational. The IRA does not prohibit taxpayers from
claiming both a rebate and one of the residential tax credits for the same project, although the rebate may
reduce the expenses eligible for the credit.
Energy Efficient Home Improvement Credit (Section 25C)
The Section 25C credit had expired at the end of 2021, but the IRA reintroduced the credit retroactively
for qualifying property placed in service during tax year 2022. For investments placed in service from
2023 through 2032, the credit amount is higher than it was in the past and the scope of qualifying
expenses eligible for the credit is expanded (Table 1.)
Taxpayers typical y claim expenses for the credit in the year in which they instal the property in their
homes. Expenses related to new home construction are claimed when “the original use of the constructed
or reconstructed structure by the taxpayer begins.” Separate from the tax credits for individuals investing
in the energy efficiency of their homes, contractors may be able to claim tax credits for constructing new
energy-efficient homes (Section 45L).
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Table 1. Major Changes to the Energy Efficient Home Improvement Credit Beginning in
2023
Major Changes for Tax Year 2023 and
Element
Tax Year 2022 (Filed in 2023)
Beyond
Rate
10%
30%
Qualifying Expenses
Qualifying energy efficiency improvements
Expenses related to qualifying home energy
instal ed during the year, and expenses related to audits paid or incurred during the year wil also
energy efficient property paid or incurred during
qualify.
the year.
The energy efficiency standards that investments
Investments must meet energy efficiency criteria
must meet to qualify wil change and update
set by statute.
automatical y in the future. Starting in 2025,
taxpayers must report their products’
identification numbers to claim the credit.
Definition of
Improvements to heating, cooling, and water-
Investments in roofs wil no longer qualify, but
“energy efficiency
heating equipment, and to a building’s
certain investments in biomass stoves and air-
improvements”
“envelope,” which includes the insulation
sealing material placed in service in 2023 or later
materials or systems, the roof, and exterior
wil . Improvements to, or replacement of,
doors and windows.
panelboards, sub-panelboards, branch circuits, or
feeders also qualify beginning in 2023.
Definition of
Spending on heating, cooling, and water-heating
Expenditures made for homes the taxpayer uses
“energy efficient
property that meets efficiency criteria.
as a residence, whether or not as their primary
property”
Associated labor and instal ation costs also
residence, wil qualify.
qualify.
Expenditures must be made on the taxpayer’s
primary residence located in the United States.
Lifetime Limit
$500 per taxpayer for the entire credit.
No lifetime limits.
$200 for windows.
Annual Limits
$300 for any single energy property item.
$1,200 for the entire credit for most taxpayers.
$150 for any qualified natural gas, propane, or oil
$600 for any single energy property item.
furnace and hot water boiler.
Notwithstanding these limits, the credit for
$50 for any advanced main air circulating fans.
qualifying expenditures on biomass stoves or

water heaters and/or heat pumps powered by
electricity or natural gas is capped at $2,000.
$600 on windows.
$150 for home energy audits.
$500 for exterior doors in the aggregate, and
$250 per exterior door.
Expiration
The credit expired at the end of 2021. The IRA
The credit wil expire after 2032.
extended it, with 2021 parameters, for 2022.
Source: CRS analysis of IRC Section 25C and P.L. 117-169.
Notes: The Section 25C credit is claimed on Form 5695. The instructions give taxpayers additional information regarding
eligibility for the credit.
Residential Energy Property Credit (Section 25D)
Through 2019, taxpayers could claim a Section 25D credit worth up to 30% of qualifying expenditures.
The credit’s rate was scheduled to be reduced to 26% through 2022 and 22% in 2023, expiring after 2023.
The IRA restored the 30% credit for the 2022 tax year and made battery storage technology placed in
service in 2023 or later eligible (Table 2).

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Table 2. Major Changes to the Residential Energy Property Credit Beginning in 2023
Major Changes in Tax Year 2023 and
Element
Tax Year 2022 (Filed in 2023)
Beyond
Rate
30% for al qualifying investments placed in
30% in 2023 through 2031. The credit’s rate is
service in 2022.
scheduled to fal to 26% in 2032 and 22% in
2034.
Qualifying expenses
Qualifying expenditures on residential solar
Biomass stoves wil no longer qualify (qualify
electric property, solar water heating property
under Section 25C instead). Battery storage
(used for purposes other than heating swimming
property placed in service in 2023 or later is
pools or hot tubs), geothermal heat pumps, smal
eligible.
wind energy property, biomass stoves, and fuel
cel power plants.
Costs associated with onsite preparation,
instal ation, and assembly also qualify.
The credit for fuel cel property is capped at
$500 per half kilowatt (kW) of capacity.
Qualifying property must be used in connection
with a residence of the taxpayer located in the
United States.
Expiration
The credit had begun phasing out and was
The credit is scheduled to begin phasing out in
scheduled to expire at the end of 2023.
2032 and expire after 2034.
Source: CRS analysis of IRC Section 25D and P.L. 117-169.
Notes: The Section 25D credit is claimed on Form 5695. The instructions give taxpayers additional information regarding
eligibility for the credit.

Author Information

Brendan McDermott

Analyst in Public Finance

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