How Home Owners Can Use the Energy-Efficient Home Improvement Tax Credit

As the nation's housing stock rapidly ages, home owners are increasingly considering the installation of energy-efficient upgrades, which can offer both environmental and financial benefits.

However, only 1.7% of tax returns filed for tax year 2023 utilized the Energy Efficient Home Improvement Credit (25C), according to IRS statistics.

Further analysis by NAHB of the tax credit highlights usage trends and potential opportunities for more taxpayers to take advantage of this home improvement incentive. Below are key takeaways from this analysis.

What is the Energy Efficient Home Improvement Credit?

The Energy Efficient Home Improvement Credit (25C) allows home owners to claim expenses for qualifying energy efficiency improvements to their primary or secondary residence. Renters can also claim the credit for certain energy-efficient appliances and product expenditures.

Who is eligible for the tax credit?

The 25C credit is available to all home owners - as well as renters for certain expenditures - who purchase eligible energy-efficient appliances and products.

The eligible improvements must be made to an existing home that is located in the United States. The credit cannot be claimed on items in homes of which you are the property landlord/owner and in which you do not live.

What types of home improvements can be claimed through the 25C?

The 25C credit can be applicable to both the purchase and installation costs for items such as heat pumps, AC units, furnaces/ boilers, water heaters, biomass stoves/boilers, and electric panel/circuit board upgrades. 25C sets energy-efficiency criteria for each eligible product. For building envelope components (insulation, doors, windows, skylights), only the purchase price can be claimed.

The most common improvements claimed in 2023 were the purchases of insulation and air sealing materials or systems, which were filed with 699,440 tax returns (29.9% of all claims).

How much can you claim through the 25C credit?

The 25C credit amount is based on 30% of the improvement's cost and is subject to the improvement's specific credit limit. For improvements such as electric or natural gas heat pumps, heat pump water heaters, or biomass stoves/boilers, the credit limit per year is $2,000. All other home improvements, such as efficient AC units, insulation/air sealing or home energy audits are limited to a combined credit limit of $1,200, with individual limitations for each item.

The total annual credit amount that can be claimed is $3,200 per year. There is no lifetime dollar limit - filers can claim the maximum annual credit every tax year in which they make eligible improvements until 2033.

The following list from the IRS shows the total annual credit limits for each qualified item in tax years 2023 through 2032.

$2,000 limit (for heat pumps, heat pump water heaters and biomass stoves/boilers)

$1,200 limit (for all other home improvements):

• $1,200 - insulation/air sealing
• $600 - efficient AC units
• $600 - efficient furnaces/boilers
• $600 - efficient water heaters
• $600 - electric panel/circuit upgrades
• $600 - exterior windows/skylights
• $500 - exterior doors ($250 per door)
• $150 - home energy audits

Where is the 25C credit claimed most often?

Geographically, the highest claim rate of the 25C tax credit for 2023 was in Maine (3.03% of tax returns in the state). Usage was significantly higher in the Northeast and Midwest, as the top 10 states for usage rates were all located in these regions. The lowest rate was in Hawaii, where only 0.5% of returns claimed the credit.

Although Maine has the highest claim rate, Washington state had the highest average credit amount at $1,191. The lowest average credit amount was in Iowa at $743. Notably, Michigan and Wisconsin were among the top 10 for claim rates, yet they had low average credit amounts.

How can I claim the 25C credit?

Taxpayers who want to take advantage of the 25C credit must file Form 5695, Residential Energy Credits with their tax returns. Filers do not need to itemize; they can take the standard deduction and still claim the 25C credit. The claim must be made for the tax year in which the qualifying item was installed into the home, not merely when it was purchased.

Additional insights about average improvement costs, credit amounts and usage rates are available in this Eye On Housing article by NAHB economist Jesse Wade.

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