The 25C Credit and the Inflation Reduction Act

The Inflation Reduction Act of 2022 enhanced and extended a tax incentive for homeowners, now called the Energy Efficient Home Improvement Credit. Governed by Section 25C of the tax code, this credit provides a direct reduction in taxes owed, encouraging the adoption of energy-saving technologies. The updated credit is available for improvements made from 2023 through 2032 and features generous annual limits and a broad range of qualifying expenses.

Eligible Homeowners and Properties

To claim the Energy Efficient Home Improvement Credit, you must make qualifying improvements to an eligible property. The credit is for improvements made to your main home, which the IRS defines as the place you live for most of the year. This property must be an existing home that you are improving, as newly constructed homes are not eligible. Eligible homes include a house, mobile home, co-op apartment, or condominium, and must be located in the United States.

Eligibility rules vary by the type of improvement. For building envelope components like windows, doors, and insulation, you must own and use the home as your primary residence. For residential energy property such as heat pumps and water heaters, the credit can be claimed for any property you use as a residence, including a second home. Landlords cannot claim the credit for rental units, but tenants may be able to claim it for improvements they make.

Qualifying Energy-Efficient Improvements

The credit covers upgrades with specific technical requirements for energy efficiency. These standards are set by programs like Energy Star or the Consortium for Energy Efficiency (CEE). You must verify that a product meets these criteria before purchase, as not all energy-efficient products qualify.

Building Envelope Components

Building envelope components are the parts of your home that separate the conditioned interior from the outside. For exterior windows and skylights to qualify, they must meet the Energy Star Most Efficient certification requirements. Exterior doors must meet applicable Energy Star standards. Insulation materials and air sealing systems must meet the standards of the International Energy Conservation Code (IECC) that were in effect at the start of the year two years prior to installation. These components must be expected to remain in service for at least five years.

Home Energy Audits

A home energy audit can qualify for the credit. The audit must include an inspection and a written report prepared by a certified home energy auditor. This report must identify the most significant and cost-effective energy efficiency improvements for the home, including an estimate of the potential energy and cost savings for each recommended upgrade.

Residential Energy Property & Clean Energy Equipment

This category includes major systems that heat, cool, and provide hot water to your home. To qualify, central air conditioners, natural gas or propane water heaters, and furnaces must meet or exceed the highest efficiency tier established by the CEE, not including any advanced tiers. Electric or natural gas heat pumps and heat pump water heaters must also meet these CEE standards. Biomass stoves and boilers have a separate requirement, needing a thermal efficiency rating of at least 75% as measured by the higher heating value of the fuel.

Electrical System Upgrades

If installing new equipment requires an electrical system upgrade, the cost of improvements to panelboards, sub-panelboards, branch circuits, or feeders can qualify. To be eligible, these components must be installed in accordance with the National Electric Code and have a load capacity of 200 amps or more.

Credit Amounts and Annual Limitations

The Energy Efficient Home Improvement Credit is 30% of the total cost of qualifying expenses in a given year. The credit is subject to several annual caps that reset each year, allowing homeowners to plan projects over multiple years to maximize their tax savings. There is no lifetime dollar limit for this credit.

The overall annual limit for the credit is $1,200. Within this total, specific caps apply to certain improvements. The credit for exterior doors is limited to $250 per door ($500 total), the credit for all exterior windows and skylights is capped at $600, and a home energy audit is limited to $150.

A separate annual limit of $2,000 applies to the installation of electric or natural gas heat pumps, heat pump water heaters, and biomass stoves or boilers. This means a taxpayer can claim a total credit of up to $3,200 in one year by combining the $1,200 credit for general improvements with the $2,000 credit for qualifying clean energy equipment.

The costs eligible for the 30% calculation vary by improvement type. For building envelope components like windows and doors, only the cost of materials qualifies. For residential energy property like heat pumps and furnaces, as well as electrical system upgrades, the costs of both the equipment and installation labor qualify.

How to Claim the Credit

Claiming the credit involves careful record-keeping and completing the proper tax form. You must claim the credit for the tax year in which the property is installed, not when it was purchased.

You must gather and maintain all necessary documentation. This includes detailed receipts or invoices that separate the costs of labor and materials, as well as any Energy Star labels. A Manufacturer’s Certification Statement, a signed document from the manufacturer certifying the product qualifies, is also required. For improvements placed in service starting in 2025, you must also obtain a Product Identification Number (PIN) from the manufacturer for each qualifying item.

To claim the credit, you must complete and attach IRS Form 5695, Residential Energy Credits, to your Form 1040 tax return. On this form, you will enter the costs of your improvements and any required Product Identification Numbers. The form will guide you through calculating the final credit amount, applying all relevant limits and caps.

The total credit from Form 5695 directly reduces your tax liability. This is a nonrefundable credit, which means it can lower your tax bill to zero, but you will not receive any portion of it back as a refund.