The new Inflation Reduction Act (IRA), signed in August of 2022, rewards homeowners for going green. Now you may qualify for either or both of two enhanced tax credits: the “residential clean energy credit” (previously the energy-efficient property credit) and the “energy-efficient home improvement credit” (previously the “nonbusiness energy property credit”).

Let’s cut to the chase — here’s a brief overview of what you need to know. 

Residential clean energy credit

The IRA extends this credit, which was previously scheduled to expire after 2023, through 2034. Currently, the residential clean energy credit is available for installing solar panels or other equipment to harness renewable energy sources like wind, geothermal, biomass or fuel cell energy.

Besides the extension, the IRA also increases the credit amount. Under prior law, the credit was set to decline to 23% in 2023 before it disappeared completely in 2024. Instead, the new law boosts the credit to 30% from 2022 to 2032 before it drops to 26% for 2033 and then 22% for 2034. The credit expires after 2034, barring any further legislative action by Congress. Note also that specific special rules may apply. For example, the credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity. 

Energy-efficient home improvement credit

The IRA also makes changes to the energy-efficient home improvement credit for making energy-saving installations. Technically, the credit expired after 2021. The basic credit was 10% of qualified expenses, but dollar caps applied to certain specific items. Also, there was a lifetime limit of $500 on the credit.

In addition to reviving the credit for 2022, the IRA boosts the credit amount to 30%, beginning in 2023. It expands eligibility to certain biomass stoves and boilers, electric panels, and related equipment and home energy audits, but eliminates eligibility for roofing and air-circulating fans.

Notably, the IRA replaces the $500 lifetime limit with a $1,200 annual limit, providing far more flexibility to homeowners. Finally, it modifies the dollar caps for some items as follows:

• $150 for home energy audits,
• $250 for each exterior door ($500 total),
• $600 for exterior windows and skylights, central air conditioners, electric panels and certain related equipment, natural gas, propane or oil water heaters, natural gas, propane or oil furnaces or hot water boilers, and
• $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (this supersedes the usual $1,200 annual limit).

Beginning in 2025, homeowners must include the manufacturer’s product identification numbers on their tax returns. The revamped credit can be claimed through 2032.