Energy-Saving Home Improvements Tax Credit: What You Need to Know

Reducing energy consumption at home lowers utility bills and supports a more sustainable environment. To encourage these upgrades, the U.S. government offers tax credits for homeowners who invest in energy-efficient improvements, helping to offset upfront costs.

Understanding how this tax credit works is essential for maximizing savings. Homeowners should know which upgrades qualify, how much they can claim, and what documentation is required.

Eligibility Requirements

To qualify for the Energy-Saving Home Improvements Tax Credit, a homeowner must meet specific criteria related to property type, usage, and timing. The credit applies only to primary residences, excluding rental properties and second homes. Certain improvements to vacation homes used personally may be eligible under specific conditions. The property must be located in the United States.

Only upgrades completed within the tax year for which the credit is claimed qualify. Purchasing materials or signing a contract is not enough—installation must be completed by December 31 of that year. The credit is nonrefundable, meaning it can reduce tax liability to zero but will not generate a refund if it exceeds the amount of taxes owed.

Income level does not affect eligibility, but homeowners subject to the alternative minimum tax (AMT) should check how it impacts their ability to claim the credit. While the credit offsets regular tax liability, it may not provide the same benefit under AMT rules.

Qualifying Equipment and Materials

Upgrades must meet specific energy efficiency standards. The IRS follows guidelines from the Department of Energy and the Environmental Protection Agency, particularly those established by the ENERGY STAR program. While many ENERGY STAR-certified products qualify, homeowners should verify eligibility before purchasing.

Heating, ventilation, and air conditioning (HVAC) systems are common qualifying improvements. High-efficiency furnaces, boilers, and central air conditioners must meet federal Seasonal Energy Efficiency Ratio (SEER) and Annual Fuel Utilization Efficiency (AFUE) standards. Heat pumps, which provide both heating and cooling, often qualify if they meet high Heating Seasonal Performance Factor (HSPF) ratings.

Water heaters qualify if they meet efficiency thresholds. Gas, oil, and propane models must have a Uniform Energy Factor (UEF) of at least 0.82 or a thermal efficiency of 90% or higher. Electric heat pump water heaters generally qualify if they meet ENERGY STAR criteria.

Windows, doors, and insulation upgrades can also earn a tax credit if they improve energy efficiency. Exterior doors and windows must meet specific U-factor and Solar Heat Gain Coefficient (SHGC) ratings, which measure insulation and heat-blocking performance. Insulation materials, including spray foam, fiberglass batts, and rigid foam boards, must comply with International Energy Conservation Code (IECC) standards for the year they are installed.

How to Calculate and Claim

The amount a homeowner can claim depends on the type of improvement and federal limits. Unlike deductions, which reduce taxable income, this credit directly lowers the amount of taxes owed. The Inflation Reduction Act of 2022 expanded these incentives, increasing the percentage of eligible costs that can be claimed and raising annual limits. As of 2024, homeowners can receive a credit of up to 30% of qualifying expenses, with a maximum annual cap of $1,200 for most improvements. Certain upgrades, such as heat pumps and biomass stoves, have a separate limit of $2,000 per year.

Since the credit resets annually, homeowners planning multiple upgrades may benefit from spreading projects over multiple tax years to maximize their total credit. For example, installing energy-efficient windows in one year and upgrading an HVAC system the next could allow a homeowner to claim the full credit in both years rather than exceeding the cap in a single year.

Claiming the credit requires filing IRS Form 5695, which calculates the total eligible credit and transfers it to Schedule 3 of Form 1040. The form requires details on the type of improvement, total cost, and applicable credit percentage. While receipts and manufacturer certifications are not submitted with the tax return, they should be retained in case of an audit. Homeowners using tax software will typically be prompted to enter this information, while those working with a tax professional should provide all relevant documentation to ensure the credit is properly applied.

Records and Documentation

Maintaining thorough records is necessary to substantiate claims for the Energy-Saving Home Improvements Tax Credit. The IRS requires proof of purchase, installation, and product eligibility, so homeowners should organize receipts, manufacturer certifications, and contractor invoices for easy retrieval if needed.

Manufacturer statements certifying that a product meets energy efficiency standards are particularly important. These certifications, often available on the manufacturer’s website or included with product packaging, confirm that the purchased equipment qualifies under IRS guidelines. Without this documentation, the IRS may disallow the credit, even if the product meets the required specifications. Keeping digital copies of these statements, along with all related receipts, can be helpful in case printed copies are lost or damaged.

Homeowners who finance their energy-efficient improvements should also keep loan agreements and payment records. If an improvement is funded through a home equity loan or another credit arrangement, documentation verifying the cost and payment schedule might be necessary. Additionally, tracking rebates or incentives received from state or local programs is important, as these may impact the final amount eligible for the federal tax credit.