The IRA 25C Tax Credit: What It Is and How to Claim It
Understand how recent changes to the 25C tax credit can benefit homeowners. Get clear guidance on turning energy-efficient upgrades into tax savings.
The Energy Efficient Home Improvement Credit, cataloged under section 25C of the U.S. tax code, provides a direct incentive for homeowners to invest in energy-saving upgrades. This tax credit was significantly expanded by the Inflation Reduction Act of 2022. It is designed to lower the after-tax cost of specific improvements, encouraging the adoption of more energy-conscious technologies in residential properties. The credit directly reduces a taxpayer’s total tax liability for the year the qualifying improvements are made.
Taxpayer and Property Eligibility Requirements
To qualify for the 25C credit, an individual must own the home where the improvements are made. Renters are generally ineligible to claim the credit. The property itself must be an existing home that serves as the taxpayer’s principal residence. A principal residence is the main home where the taxpayer lives for most of the year.
The credit is not available for newly constructed homes. The property must be located in the United States. This includes houses, houseboats, mobile homes, cooperative apartments, and condominiums that meet the criteria.
Second homes, vacation properties, and residential rental properties owned by a landlord do not qualify. If a taxpayer uses a portion of their home for business, the credit calculation must be allocated. The credit can only be claimed for the share of expenses related to the personal, residential use of the home.
Qualifying Energy-Efficient Improvements
The 25C credit covers two main categories of expenditures: qualified energy efficiency improvements and residential energy property expenditures. The first group includes components that seal and insulate the home. This encompasses items such as new exterior doors, windows, and skylights that meet specific Energy Star requirements. Insulation materials and air sealing products, like weather stripping and caulk, also fall into this category.
The second group consists of major system upgrades. Residential energy property expenditures include equipment like central air conditioners, natural gas or oil furnaces, and high-efficiency water heaters. Electric or natural gas heat pumps and heat pump water heaters are also prominent qualifying items.
Beyond physical components, the cost of a home energy audit can also qualify for the credit. An audit, performed by a certified professional, assesses a home’s energy use and identifies opportunities for efficiency improvements. The cost of this assessment itself is considered a qualifying expense under the 25C credit rules.
Credit Amounts and Limitations
The tax credit is calculated as 30% of the total cost of qualifying home improvements made during the year, including the cost of labor for installation. However, this is subject to several annual caps.
There is a total yearly limit of $1,200 for most energy efficiency improvements. Specific components within this category have their own lower sub-limits that apply first. The credit for exterior doors is limited to $250 per door, with a total maximum of $500. For exterior windows and skylights, the credit is capped at $600 per year, and for home energy audits, the credit is limited to $150 per year.
For certain high-efficiency equipment, there is a separate and more generous annual credit limit of $2,000. This higher cap applies to electric or natural gas heat pumps, heat pump water heaters, and biomass stoves and boilers. This limit is independent of the $1,200 cap for other items, allowing a potential total credit of up to $3,200 in a single year if a taxpayer installs both types of upgrades.
How to Claim the 25C Credit
To claim the Energy Efficient Home Improvement Credit, a taxpayer must complete and file IRS Form 5695, Residential Energy Credits, with their annual federal tax return. The final calculated credit from Form 5695 is then transferred to the main Form 1040. This reduces the taxpayer’s overall tax liability.
Proper record-keeping is required for claiming the credit. Homeowners must retain all relevant documentation, including purchase receipts, invoices, and any manufacturer certifications that verify the energy efficiency of the installed products.
The credit is nonrefundable, which means it can reduce a taxpayer’s tax liability to zero, but no portion of the credit will be paid out as a refund if it exceeds the amount of tax owed. It is advisable to consult the instructions for Form 5695. You should also maintain organized records in case the IRS requests verification of the claimed expenses.