IRS Home Credits: What Qualifies and How to Claim Them

A tax credit offers a dollar-for-dollar reduction of the income tax you owe. Unlike a tax deduction, which only lowers your taxable income, a credit directly decreases your final tax bill. For instance, a $1,000 tax credit reduces your owed taxes by the full $1,000. The Internal Revenue Service (IRS) provides several tax credits to make homeownership more affordable and to incentivize certain home improvements, targeting expenses from energy upgrades to mortgage interest.

Energy-Related Home Credits

Energy Efficient Home Improvement Credit

Homeowners making specific energy-efficient upgrades may be eligible for the Energy Efficient Home Improvement Credit. This credit is equal to 30% of the cost of qualifying expenses and has a combined annual limit of up to $3,200.

This total is broken into two parts. There is a $1,200 annual limit for energy property costs and certain home improvements. This includes new exterior doors, limited to $250 per door with a $500 total maximum, and new exterior windows and skylights, which are capped at $600. The cost of a home energy audit, up to $150, also falls under this limit.

Separately, there is an additional annual limit of up to $2,000 for installing qualified heat pumps, biomass stoves, or boilers. A homeowner can claim both, allowing for a maximum combined credit of $3,200 in a single year. To qualify, the improvements must be made to your primary residence, which is the home you live in for most of the year. This credit is nonrefundable, meaning it can reduce your tax liability to zero, but you will not receive any portion of it back as a refund.

Residential Clean Energy Credit

For larger-scale renewable energy projects, the Residential Clean Energy Credit is available. This credit is equal to 30% of the cost of new, qualified clean energy property for your home, with no overall dollar limit. This applies to qualifying systems installed through 2032, after which the credit percentage is scheduled to decrease. Unlike the home improvement credit, this can be claimed for a primary or secondary residence.

Eligible projects include:

• The installation of solar electric panels
• Solar water heaters
• Geothermal heat pumps
• Battery storage technology with a capacity of at least 3 kilowatt-hours (kWh)

All associated costs, including labor for onsite preparation, assembly, and original installation, are included when calculating the credit. If the credit is more than the tax you owe, the unused portion can be carried forward to reduce your taxes in future years.

Mortgage Credit Certificate

The Mortgage Interest Credit is a tax benefit designed to assist lower-income individuals in affording homeownership. This credit comes from a qualified Mortgage Credit Certificate (MCC) provided by a state or local government housing finance agency, not the IRS. An MCC is available to first-time homebuyers who meet specific income and home purchase price requirements, which vary by location. The certificate is issued only for a new mortgage used to purchase a main home.

The credit’s value is a percentage of the mortgage interest you pay, with the rate (10% to 50%) detailed on your MCC. The credit is capped at $2,000 per year if your certificate’s credit rate is higher than 20%. If the credit exceeds your tax liability, the unused portion can be carried forward for up to three subsequent years.

You cannot claim both the full credit and the full mortgage interest deduction for the same interest. You must reduce your mortgage interest deduction on Schedule A by the amount of the credit claimed. If you sell the home within the first nine years of purchase, you may have to repay a portion of the benefit from the MCC program.

Required Documentation and Forms

To claim home-related tax credits, you must keep records and use the correct IRS forms. For the energy credits, keep all purchase receipts, invoices, and the Manufacturer’s Certification Statement for each product installed. This is a signed document from the manufacturer attesting that the product qualifies. For certain items installed starting in 2025, you will also need a product identification number from the manufacturer.

For the Mortgage Interest Credit, the primary document is the Mortgage Credit Certificate (MCC) from your state or local housing agency. You will also need Form 1098, the Mortgage Interest Statement, from your lender, which reports the total mortgage interest you paid.

The information from these documents is transferred to specific IRS forms. For energy credits, you must complete Form 5695, Residential Energy Credits, to calculate your final credit amount. For the Mortgage Interest Credit, you will use Form 8396, Mortgage Interest Credit, to determine your allowable credit.

Claiming the Credit on Your Tax Return

After completing the necessary forms, the credit amounts are transferred to your main tax return, Form 1040. The total credit calculated on Form 5695 and Form 8396 is reported on Schedule 3 (Form 1040), Additional Credits and Payments. The total from Schedule 3 then flows to the main Form 1040, where it directly reduces your final tax liability.

When filing a paper return, you must attach the completed Form 5695 and Form 8396 to your tax return. If you use tax preparation software, the program will automatically perform these transfers for you after you have entered the required information from your receipts, certificates, and supplemental forms.