Residential Energy Credit Explained
It is unsurprising to most people that non-renewable energy sources can only support our residential, commercial, and industrial power needs for so long, and that eventually, climate conservation must be made a priority.
For this reason, the government aims to incentivize taxpayers to choose more energy-efficient methods, such as nuclear or hydro power, instead of oil, by offering clean energy tax credits like the Residential Energy Credit that reduce the tax liability for qualifying costs related to clean energy home improvements.
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Key Takeaways:
- The Residential Energy Credit, also known as the Residential Clean Energy Credit (RCE), is an IRS tax credit worth 30% of the costs of installing qualifying clean energy property into your home between 2022 and 2023.
- Qualified property for the residential clean energy credit includes battery storage technology, fuel cells, geothermal heat pumps, solar electric panels, solar water heaters, and wind turbines, as long as they are new and not previously used.
- Taxpayers can claim the residential energy tax credit on the property purchase as well as the preparation, assembly, and installation labor costs.
- Taxpayers can claim the residential energy credit by filing IRS Form 5695, Residential Energy Credits, with their tax return to the IRS during the year that the property was installed, and not just purchased.
What Is The Residential Energy Credit?
The Residential Energy Credit, also referred to as the Residential Clean Energy Credit (RCE), is an IRS tax credit offered to eligible taxpayers who install qualifying clean energy property into their homes between 2022 and 2023.
The RCE credit is worth 30% of the qualified expenses involved in the qualified property installation.
Who Qualifies To Claim The Residential Clean Energy Credit?
Taxpayers may qualify to claim the residential clean energy credit if they live in the home where the clean energy improvements were made.
It doesn’t matter if the individual is the owner of the residence or if they rent – as long as they make the improvements, they are eligible to claim the tax credit.
Home Business Use
Due to the fact that the residential energy tax credit is offered for residential property, if a house is solely used for business purposes, the taxpayer will not be eligible to claim the tax credit. However, they may qualify to claim a partial tax credit if the home is only partly used for business.
If less than 20% of the home is used for business, they may be eligible for the full tax credit. If the business use within the home is more than 20% of the property, the amount of the credit they can claim is dependent on the expenses that were allocable to non-business use.
What Are Qualified Expenses For The Residential Energy Tax Credit?
To be considered eligible property for the residential clean energy tax credit, the expenses must be brand new and not previously owned or used in any way. Some of the types of qualified residential clean energy properties include:
- Battery storage technology (as of 2023)
- Fuel cells
- Geothermal heat pumps
- Solar electric panels
- Solar water heaters
- Wind turbines
In addition to the type of clean energy property impacting its eligibility when claiming the residential clean energy credit, there are certain standards the property must meet in order to qualify.
- Solar water heaters: must be certified by the Solar Rating Certification Corporation or another comparable entity that is endorsed by the state the taxpayer lives in.
- Geo thermal heat pumps: must meet the set Energy Star requirements at the time the property is purchased.
- Battery storage technology: must be energy efficient with a capacity of no less than 3-kilowatt hours
Alongside the costs of purchasing the clean energy property and materials, other costs that may qualify for this tax credit include the labor for onsite preparation, assembly, installation, piping, or wiring.
Incentives, Subsidies, and Rebates
Taxpayers may be required to subtract incentives, subsidies, or rebates from their qualified property expenses if they are considered a purchase-price adjustment.
State energy efficiency incentives are usually only deducted from qualified costs if they qualify as a rebate or purchase-price adjustment under federal tax law.
Public utility subsidies for purchasing or installing clean energy property must be deducted from qualified expenses.
Rebates must be deducted from qualified expenses if the rebate is based on the property cost, it came from an entity connected to the property sale and was not offered as a payment for services provided.
How To Claim The Residential Energy Tax Credit
Taxpayers can claim the residential clean energy tax credit by filing IRS Form 5695, Residential Energy Credits during the tax season alongside their federal income tax return. It is important to note that the tax credit must be claimed for the tax year when the clean energy properties were installed – if they were merely purchased, the investment would not qualify for the residential energy credit amount.
Part I of IRS Form 5695 is where the taxpayer must input information related to the residential clean energy credit, including their qualified costs for solar panels, solar water heating, small wind energy property, geothermal heat pumps, biomass fuel property, and fuel cell property.
Part II of IRS Form 5695 is related to the Energy Efficient Home Improvement Credit, which used to be the non-business energy property credit. Within this section, taxpayers can enter details about energy efficiency improvements, such as their use of qualified natural gas,
Installing energy-efficient equipment in your home will not only make a positive impact on the environment but will also offer you tax savings through clean energy credits. If you are unsure about your credit limits or how you can make the most of your tax savings, set up a free consultation with the tax professionals at Ideal Tax today.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
