What Is the Tax Section 25c Home Energy Credit?

The Energy Efficient Home Improvement Credit, under Section 25C of the Internal Revenue Code, offers a financial incentive for homeowners undertaking specific energy-saving projects. This nonrefundable tax credit lowers the after-tax cost for individuals who invest in qualifying energy efficiency upgrades for their primary homes, directly reducing their tax liability. The Inflation Reduction Act of 2022 extended and expanded this credit, making it available for property placed in service through the end of 2032.

Eligible Improvements and Credit Limits

The credit is calculated as 30% of the total amount paid for qualified improvements, but it is subject to several annual caps depending on the type of property installed. These limits are reset each year, meaning a taxpayer can claim the credit for new projects in subsequent years. The total possible credit in a single tax year is capped at $3,200, though this maximum is achieved through a combination of different improvement categories with their own specific limits.

One portion of the credit covers the home’s building envelope components. While the credit is 30% of the cost, there is a combined annual limit of $1,200 for all these items, with further sub-limits for specific products. Qualifying items include:

• Insulation and air sealing materials
• New exterior windows and skylights (capped at $600 annually)
• Exterior doors (capped at $250 per door, with a $500 total annual maximum)
• Electrical panel upgrades needed to support other energy-efficient equipment (capped at $600)

Another major category is for residential energy property, which has a separate and more generous annual limit. This group includes equipment such as central air conditioners, natural gas or electric heat pumps, heat pump water heaters, furnaces, and biomass stoves or boilers. For these items, taxpayers can claim a credit of 30% of the cost, up to a total of $2,000 per year. This $2,000 limit is distinct from the $1,200 cap on building envelope components, allowing taxpayers to combine credits from both categories.

The credit also covers the cost of a home energy audit conducted by a certified auditor. The auditor must provide a written report identifying the most cost-effective energy improvements for the home. The credit for an audit is limited to $150 annually.

Taxpayer and Property Requirements

To qualify for the Energy Efficient Home Improvement Credit, the improvements must be made to the taxpayer’s principal residence. This is defined as the home where the taxpayer lives for the majority of the time. The credit is not available for properties that are used exclusively for business purposes or are rented out to others full-time.

The credit applies only to existing homes, as newly constructed homes are not eligible. The components installed must be new and expected to remain in service for at least five years.

While homeowners are the most common claimants, renters may be eligible if they pay for qualifying improvements. However, improvements to the building envelope, like windows and doors, are only eligible if installed at a residence the taxpayer owns. The credit can only be claimed for the tax year in which the property is “placed in service,” meaning when it is fully installed and ready for use.

How to Claim the Credit

Taxpayers must keep all receipts or invoices detailing the cost of qualifying products and any associated labor. For building envelope components like windows and insulation, only the cost of the materials qualifies. For residential energy property and electrical panel upgrades, the costs of onsite preparation, assembly, and original installation are eligible for the credit.

You will also need the Manufacturer’s Certification Statement. This is a signed document from the manufacturer attesting that the product meets the required energy efficiency standards. This statement should be kept with your tax records but is not filed with your return, though it is necessary proof of eligibility.

The credit is calculated on IRS Form 5695, Residential Energy Credits, which is filed with your annual Form 1040. The total credit amount from this form is then transferred to Schedule 3 (Form 1040), reducing your overall tax liability. If filing electronically, tax software will automatically handle these forms and calculations.

Beginning in 2025, for property placed in service from that year forward, taxpayers must report a Product Identification Number (PIN) for the item on their tax return. This PIN will be assigned by qualified manufacturers who have registered with the IRS.