With summer here, many homeowners are considering home renovations and cleaning projects. If you’re thinking of making some improvements to your home, you could potentially save money. Thanks to the Inflation Reduction Act (IRA) and the Residential Clean Energy Credit (RCEC), there have been changes that make it possible to offset the cost of improving your personal residence through tax credits. This article provides an overview of the RCEC, outlines qualifying improvements, and explores home improvement ideas that may offer monthly operating costs and tax savings.
Overview of the Residential Clean Energy Credit (RCEC)
The RCEC helps taxpayers offset costs associated with improving their personal residences. The credit allowed is a percentage of qualifying costs incurred on the project. Currently, this percentage is 30%, but it does change depending on the tax year and legislative updates. These tax credits are non-refundable, meaning they can only be used to offset tax liabilities. However, you may carry them forward to future tax years if not fully used in the year the credit is generated. There are limitations on the credit, including cost-related limitations and regulatory criteria from organizations such as The Consortium for Energy Efficiency (CEE), International Energy Conservation Code (IECC), and ENERGY STAR.
The RCEC allows taxpayers to claim the credit for qualifying expenditures incurred on either existing homes or newly constructed homes. You should collaborate closely with your contractor or supplier to ensure that the qualifying improvements meet the relevant standards at the time of purchase. If you receive documentation from a supplier with a statement or supporting proof that your purchase qualifies, you can use that certification when claiming the tax credit.
If you use more than 20% of your residence for business purposes, the amount of the credit will be limited by the amount of business use. These credits are not applicable to properties used solely for business.
Home Improvement Ideas with Potential Tax Savings
- Powering Your Home with Solar Power
Consider installing solar panels on your residence’s roof or property. Solar panels convert sunlight into electricity, reducing your reliance on traditional power sources and lowering your electricity bills. Properties placed into service between 2022 and 2032 may qualify for a non-refundable tax credit equal to 30% of the cost of materials and labor used to install the system. Solar panels that also function as the roof or structural components of the building are eligible for this tax credit. Your residence must be in the US to qualify.
Read here to learn how solar power works and how it integrates with your local power grid.
In addition to tax considerations, you will want to review your local net metering programs to see how your utility bills will be affected. Net metering generally allows you to earn a credit valued at market rates for the excess energy you generate; you can use this credit to offset your usage when you are unable to generate enough electricity to cover your needs, such as at night or other peak periods. Some states, such as California, are transitioning from net meter to net billing models where the credit is valued at a lower wholesale rate. With this model, you would be billed for the difference between rates during times when you are not able to generate enough electricity to cover your needs.
- Powering Your Home with Wind Power
Install a wind turbine to harness wind energy and generate electricity for your home. This can help you reduce your reliance on traditional power sources and lower your electricity bills. Properties placed into service between 2022 and 2032 may qualify for a non-refundable tax credit equal to 30% of the cost of materials and labor used to install the system. Please note that your residence must be in the US to qualify.
Read here to learn how wind turbines work and how they integrate with your local power grid.
- Using a Battery Storage System
A battery storage system can save electricity from the grid during non-peak hours and be used during more expensive usage periods or power outages. This credit came into effect on January 1, 2023, for storage systems with a capacity of three or more kilowatt-hours. The size and upgradeability of the storage systems available on the market vary, so you should consider your electricity usage carefully before purchasing.
Properties placed into service between 2022 and 2032 may qualify for a non-refundable tax credit equal to 30% of the cost of materials and labor used to install the system. Your residence must be in the US, and based on the wording currently in the tax code, the system needs to be a permanently integrated fixture of your home.
Considering the rollout of net billing programs, installing a battery storage system in connection with a solar or wind power generation system may allow you to maximize your utility savings on a regular basis.
- Using Thermodynamics for Heating and Cooling
Consider installing a solar water heater or a geothermal heat pump to use your environment for heating and cooling your home. Solar water heaters must meet state-specific standards and derive at least half of their energy from the sun to be eligible for federal credit. Heat pumps, on the other hand, use thermal energy to heat or cool your home.
To qualify for the tax credit, the unit must meet ENERGY STAR standards at the time of purchase. Properties placed into service between 2022 and 2032 may qualify for a non-refundable tax credit equal to 30% of the cost of materials and labor used to install either system.
State and Local Rebates and Incentives
In addition to federal tax credits, you may be eligible for local rebates and incentives from cities, states, and/or utility agencies. These can further reduce the cost of qualifying improvements. However, it’s important to understand the impact of these subsidies on the tax credits or taxable income for the year; you’ll want to consult a tax professional for guidance. Oregon and California have several programs to help make these improvements more cost-effective for their residents.
With the Inflation Reduction Act, the Residential Clean Energy Credit provides homeowners with opportunities to offset the costs of improving their personal residences through tax credits. By exploring home improvement ideas such as solar power, wind power, battery storage systems, and thermodynamic solutions, homeowners can potentially save money on their federal taxes and potentially reduce their monthly expenses. The Department of Energy has excellent ideas and resources if you’re looking for additional information about these programs. When you are ready to explore how some of these items may impact your tax situation, Aldrich CPAs + Advisors are here to help.
Meet the Author
Senior Tax Manager
Matthew Kanter, CPA, CFP®
Aldrich CPAs + Advisors LLP
Matthew Kanter joined the firm in 2017 with five years of experience working with individuals and small businesses at a small accounting firm in the Portland, Oregon area. Here at Aldrich, Matthew assists with tax compliance and planning for individuals, high net-worth clients, estates, and trusts. Matthew enjoys empowering his clients to focus on their…
- Certified Public Accountant
- High-Net-Worth Individuals
- Strategic Tax Planning and Compliance