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Green Energy Tax Credits for Home Improvement & Energy Efficiency


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For homeowners and bill-paying renters, the cheapest way to save money on utilities is to reduce consumption. In the summer, raising the temperature setting on your air conditioner or using a high-speed floor fan on all but the hottest days can drastically cut air conditioning costs. In the winter, you can trim your gas or oil bill by wrapping your windows, lowering your thermostat a few degrees, and settling into your favorite sweater.

Such fixes are fast, easy, and effective. But they don’t permanently reduce your fossil-fuel-burning appliances’ carbon footprints or improve your home’s ability to retain warm or cool air. To make a lasting, meaningful difference in your home’s energy profile, your home requires more involved — and often expensive — home improvements and upgrades.

Fortunately, federal, state, and local government tax credits and other financial incentives partially offset the cost of a slew of residential green energy projects, helping more homeowners finance them out of their savings or afford the payments on Federal Housing Administration (FHA) 203k renovation loans.

And these federal tax credits and incentives along with hundreds of state and local credits and incentives can help you make your green home a reality.

Federal Green Energy & Home Efficiency Tax Credits & Incentives

Most of these green energy tax credits and incentives are valid through the end of 2021. The exception is the Energy Efficient Mortgage program, which is available indefinitely. The federal government offers these programs, which are available to any American homeowner who files a federal tax return.

Unless otherwise noted, you can apply for each credit by filing IRS Form 5695 with your federal tax return.

Solar Energy Generation & Storage (Solar Investment Tax Credit)

The solar investment tax credit applies to two types of residential solar energy systems.

The first is photovoltaic solar electricity generation systems (solar panels), which use the carbon-free power of the sun to generate electricity.

The second is solar energy storage systems. These are residential power storage units, such as the Tesla Powerwall, that store electricity generated exclusively by onsite solar panels.

Energy storage systems that store grid electricity or electricity generated by nonrenewable onsite sources like diesel generators are ineligible for the credit.

Solar panels and solar energy storage systems both qualify for a tax credit equal to 26% of the equipment and installation costs through 2022 with no cap on credit size. In 2023, the credit decreases to 22% and expires for residential customers on Dec. 31 of that year. Commercial customers can claim a 10% credit on qualifying solar generation installations indefinitely after 2023.

Qualifying solar panels must generate electricity for the residence itself. They must meet all applicable fire and electrical safety code requirements, which vary by jurisdiction.

According to the Solar Power Authority, equipment and installation costs add up to approximately $7 to $9 per watt, or $25,000 to $35,000 for a 5-kilowatt (kW) system capable of powering the average American home. However, solar panel prices have fallen considerably in recent years.

Moreover, in addition to the solar investment tax credit, many utility companies and state and local governments offer cash incentives and rebates that can dramatically reduce out-of-pocket costs.

Taxpayers can claim this credit on existing and new-construction homes (including second homes) but not on rental properties. The United States Department of Energy (DOE) and EnergySage have more information about the solar investment tax credit.

Solar Water Heaters (Renewable Energy Tax Credit)

Solar water heaters are among several residential renewable energy systems that qualify for the federal renewable energy tax credit. It provides a tax credit equal to 26% of total system costs (including installation) for systems installed through Dec. 31, 2022, and a tax credit equal to 22% of total system costs with installation for systems installed in 2023.

To qualify for the credit, solar water heaters must generate at least half their energy from solar and must be Solar Rating and Certification Corporation (SRCC)-certified. However, all Energy Star-rated solar water heaters qualify. You must use heated water in the dwelling itself — swimming pool and hot tub heaters don’t count.

According to Angi (formerly Angie’s List), the typical solar water heater costs $2,000 to $5,500 with installation, though pricier models can cost more.

Wind Energy Generation (Renewable Energy Tax Credit)

Small wind turbines (residential) use the power of the wind to generate carbon-free electricity. Though they’re compact compared to utility-scale turbines, which soar hundreds of feet into the air and sweep an area of an acre or more, they do require ample space, so they’re not ideal in densely populated urban areas.

According to EnergySage, equipment and installation costs for a turbine sufficient to power an average home (roughly 5 kW of generating capacity) vary dramatically — from $15,000 to $75,000 before rebates, depending on system capacity. More expensive systems take longer to pay for themselves, though many installers offer financing options that reduce upfront costs.

Residential wind turbine systems also qualify for the renewable energy tax credit. According to the DOE, small wind turbines qualify for a tax credit equal to 26% of equipment and installation costs with no upper limit on credit size through 2022. The credit steps down to 22% for systems installed in 2023 and expires at the end of that year.

Qualifying turbines’ manufacturer-determined generating capacity (maximum capacity under ideal wind conditions) must be no more than 100 kW. Taxpayers can claim the credit on new and existing primary residences and second homes, but not on rentals.

Geothermal Heat Pumps (Renewable Energy Tax Credit)

Geothermal heat pumps draw upon the planet’s vast reserves of internal heat to generate low-carbon heat and electricity. Depending on the system, they provide hot water, air conditioning, and home heating.

According to Energy Saver (an office of the DOE), geothermal heat pumps use 25% to 50% less electricity than traditional heating and cooling systems. However, they’re pricey. According to EnergyHomes.org, it can cost $20,000 to $25,000 to install a geothermal system in a 2,500-square-foot home, with a payback period of up to 10 years.

Geothermal heat pumps qualify for a tax credit equal to 23% of equipment and installation costs with no upper limit through 2022 and a 22% tax credit in 2023. The credit expires at the end of 2023 unless Congress chooses to extend it.

Qualifying geothermal systems must meet the minimum efficiency and performance benchmarks outlined by Energy Star. They can generate some or all the water heat, house heat, and air conditioning for the property.

The credit applies to systems installed in new and existing primary homes and second homes, but not rental properties.

Fuel Cell Energy Generation (Renewable Energy Tax Credit)

Residential fuel cell and microturbine systems are compact units that simultaneously generate home heat, water heat, and electricity from a single location within the home. They typically run on natural gas or biofuels (liquid fuel made from organic materials) and can operate independently of the local power grid (meaning they continue to function during blackouts).

They’re quite costly — per FuelCellsWorks, total system costs can approach $100,000 in existing homes. New construction installations are usually less expensive because you don’t need to do any retrofitting to install them.

Fortunately, these systems qualify for a federal tax credit equal to that for wind, solar, and geothermal. Homeowners can claim credits equal to 26% of equipment and installation costs through 2022 and 22% in 2023. Unless Congress later extends it, the credit expires on Dec. 31, 2023.

Qualifying systems must have 30% or better efficiency ratings and generating capacities of at least 0.5 kW. The credit applies to systems installed in new and existing primary homes only. Second homes and rental properties are ineligible.

Biomass Fuel Stoves (Renewable Energy Tax Credit)

Biomass fuel stoves burn organic fuels to heat homes or water (or both). Depending on the type of stove, biomass fuels can include wood, processed wood products like pellets, agricultural crops and crop residue, and naturally occurring plants and grasses.

Biomass fuel stoves are comparatively affordable, with average upfront costs for a wood pellet stove ranging from $1,500 to $3,500, according to EnergySage. Annual pellet costs come to about $750 on average, per EnergySage.

The renewable energy tax credit is available on newly installed biomass fuel stoves with 75% or better thermal efficiency ratings. The credit is equal to 26% of equipment and installation costs for systems installed through Dec. 31, 2022, and 22% of system costs for systems installed through 2023. Absent Congressional action, the credit expires on Dec. 31, 2023.

Energy Efficient Mortgage Program

The FHA’s long-running Energy Efficient Mortgage program (EEM) bundles the cost of energy-efficient home improvements into a new purchase, refinance, or 203k rehabilitation loan and insures the entire amount.

The lender doesn’t factor the portion of the loan earmarked for the improvements into the underwriting calculations. For example, a borrower who would typically qualify for a loan no larger than $150,000 could get a $155,000 EEM if $5,000 of the loan’s principal went to cover approved energy-efficient improvements.

Under FHA guidelines, borrowers can put as little as 3.5% of the purchase price down, though they’re required to pay annual mortgage insurance premiums for at least the first 11 years of their mortgage. The U.S. Department of Housing and Urban Development has more information about annual mortgage insurance premiums for FHA mortgage borrowers.

Before applying for an EEM, homeowners and buyers must get a home energy assessment from a qualified professional certified by the Building Performance Institute or Residential Energy Services Network. They must then use the results of the assessment to identify realistic opportunities for efficiency upgrades and improvements.

The EEM program rewards homeowners for cost-effective projects only. The FHA defines cost-effective upgrades and improvements to existing homes as those likely to save the homeowner enough on energy costs to pay for themselves.

In new-construction homes, the FHA defines cost-effective upgrades as exceeding the most recent HUD-adopted standards set by the International Energy Conservation Code.

The EEM program’s financing capacity is not unlimited. No matter how many cost-effective projects their assessors identify or projects’ cumulative dollar value, homeowners can use EEMs to finance only the lesser of:

  • The total value of the cost-effective improvements identified by the home energy assessment
  • The lesser of 5% of the home’s adjusted value, 115% of the median local price of a single-family dwelling, or 150% of the national conforming mortgage limit

EEMs have been available to borrowers across the U.S. since 1995 and are expected to remain available indefinitely.

Nonrenewable Energy-Efficient Home Improvements (Nonbusiness Energy Property Credit)

In 2021, Congress reauthorized a raft of federal tax credit programs for energy-efficient home improvements, collectively known as the nonbusiness energy property tax credits, through Dec. 31, 2021.

The most popular of those programs promises federal income tax credits of up to $300 to owner-occupants for installations of qualifying air source heat pumps, biomass stoves, efficient central air conditioning, efficient nonsolar water heaters, and conventional boilers and furnaces.

It also includes federal income tax credits equal to 10% of the total cost (up to a $500 maximum credit in most cases) for efficient building envelope improvements like windows, doors, roofs, and insulation.

Whether these credits are financially beneficial for you depends largely on how much you pay for them upfront and how much they can save you in the long run.

Air Source Heat Pumps

Air source heat pumps efficiently distribute heat throughout the home, providing warm and cool air (in a single system) at anywhere from one and a half to three times the efficiency of conventional heating and cooling systems.

Though newer models can operate through extended subfreezing periods, heat pump efficiency declines as outdoor temperature does. As such, systems aren’t appropriate for year-round use in places with very cold winters, such as Alaska, Canada, higher elevations of the Mountain West, and the interior of the northern United States.

Still, in milder climates (lower elevations on the West Coast, most of the United States’ southern tier, the coastal Northeast, and Mid-Atlantic regions), heat pumps can entirely replace traditional furnaces and air conditioners.

In colder climates, heat pumps are typically paired with oil or gas furnaces to provide adequate heat at the beginning and end of the heating season, when outside temperatures are high enough for the systems to work properly.

According to the Northeast Energy Efficiency Partnerships, heat pumps save an average of $459 per year when replacing electric resistance heaters and $948 per year when replacing oil-fired systems.

Ductless air source heat pumps capable of heating an entire average-sized home cost anywhere from about $4,500 to about $8,000 for equipment and installation, according to HomeAdvisor. Larger mini-split systems can cost as much as $14,500 for equipment and installation.

Central Air-Conditioning Systems

Efficient central air-conditioning systems use grid electricity to generate and spread cool air throughout dwellings. Any air-conditioning systems recognized as Energy Star Most Efficient qualify for the tax credit.

According to This Old House, it costs $3,500 to $4,000 to install central air conditioning in a 2,000-square-foot home with existing forced-air heating ductwork. New ducts cost between $10 and $20 per square foot in homes without existing ductwork, adding anywhere from about $500 to $2,000 to the project cost, per HomeAdvisor.

In time, you may recoup some of these costs. According to Energy Star, a new high-efficiency air conditioner can reduce cooling costs up to 20% when it replaces a less efficient unit that’s more than 10 years old.

Nonsolar Water Heaters

Nonsolar water heaters use natural gas or electricity to heat water used in the home. To qualify for the nonbusiness energy property tax credit, gas and electric heaters must meet minimum efficiency standards. Many Energy Star-certified new gas water heaters and most Energy Star-certified new electric water heaters (heat pump water heaters) qualify.

According to HomeGuide, a 40- to 50-gallon tank water heater costs about $650 to $1,600 on average to install, while a tankless water heater costs up to about $2,500 to install. Costs vary widely by heater model, the installer’s rate (a licensed plumber typically charges more), and whether you require disposal of the old heater.

According to Energy Star, a new electric water heater can save homeowners up to $3,500 in energy costs over its lifetime. Gas water heater savings aren’t quite as dramatic but still make a difference: about $25 per year, or $250 over 10 years, according to Energy Star.

Conventional Fuel Boilers & Furnaces

Efficient boilers and furnaces use fossil fuels like natural gas and oil to provide hot water or air to home heating systems. All Energy Star-certified conventional fuel furnaces and burners (except furnaces rated only for use in the U.S. South region) qualify for the tax credit.

According to HomeAdvisor, a new boiler installation costs anywhere from about $3,500 to $8,000, with pricing higher for larger and higher-efficiency models. HomeAdvisor estimates a new furnace costs approximately $2,500 to $6,500, depending on the model.

According to Energy Star, new Energy Star-rated conventional fuel furnaces are up to 15% more efficient than older models. New Energy Star-rated conventional fuel boilers are up to 5% more efficient than the models they replace. That increased fuel-efficiency translates directly into savings.

Building Envelope Improvements

The “building envelope” is any part of the building that lies between conditioned indoor spaces and the outdoors. Depending on its location and construction, a building’s envelope can include its exterior walls, roof, windows, doors, skylights, and lower-level floors.

The nonbusiness energy property tax credits cover improvements to various parts of the building envelope. Unless otherwise noted, all apply to existing principal residences only and offset 10% of total improvement costs (not including insulation) up to a $500 maximum credit.

Second homes, new construction houses, and rental properties don’t qualify.

Insulation

This credit applies to insulation in any part of the building envelope, including attics, crawlspaces, basements, and exterior walls. Qualifying insulation types include (but are not limited to) batt, blow-in, roll, expanding spray, rigid board, and pour-in-place.

Some additional products that reduce heat loss also qualify, including weatherstripping, caulk, house wrap, and canned spray foam for small air leaks.

According to Fixr, insulation costs between $1 and $3 per square foot, so it would cost approximately $500 to $1,500 to insulate a 500-square-foot attic floor, depending on the type of material. The average cost of insulating an entire 2,500-square-foot house ranges from $2,000 to $6,000, according to Fixr.

Energy Star estimates homeowners can save up to 15% on total heating and cooling costs and 11% on total energy costs by adding adequate insulation throughout the building envelope.

Roofs

This credit covers Energy Star-rated asphalt or metal roofing materials with cooling granules or pigmented coatings designed to reduce heat absorption.

According to HomeAdvisor, it costs approximately $5,500 to $11,000 to professionally install a new asphalt roof on an average-size home. More expensive materials, such as steel or aluminum, typically cost more to install. However, they tend to last longer.

According to Energy Star, efficient roofing materials can reduce peak heating and cooling demand by 10% to 15%.

Windows and Skylights

This credit applies to Energy Star-rated windows and skylights. Efficient new and replacement windows and skylights qualify.

HouseLogic pegs the cost of a new double-paned window at $270 to more than $800, including installation. High-efficiency windows generally come in at the higher end of that range.

These costs quickly add up. If you’re looking to replace all the windows in an average-size home, expect to pay a low five-figure sum. This credit is capped at $200 of improvement costs, not including installation.

According to Energy Star, replacing a home’s windows and skylights with Energy Star-rated fixtures reduces total energy costs by 12%, on average.

Doors

This credit covers Energy Star-rated exterior doors, which typically cost between $1,500 and $2,500 for a basic fiberglass or steel door, according to Angi.

According to Energy Star, replacing a home’s doors with Energy Star-rated fixtures reduces total energy costs by 12%, on average.


Select State, Local, & Utility Credits & Incentives

Every state government has a unique lineup of green energy and home efficiency tax credits and incentives, and many smaller jurisdictions, such as city and county governments, offer green breaks.

Additionally, some of the country’s largest utilities cut their customers financial slack too.

DSIRE, a DOE-funded initiative housed at North Carolina State University’s NC Clean Energy Technology Center, has a comprehensive, up-to-date list of state, local, and utility-run green policies and incentives. Some representative listings include:

  • Solar Water Heaters, Pennsylvania. Owner-occupant customers of select Pennsylvania utilities qualify for state income tax rebates up to $500 per system. You must hire a licensed contractor to install a qualifying solar water heater.
  • Renewable Energy Products, Rhode Island. The state of Rhode Island waives its 7% sales tax on items defined by state statute as “renewable energy products.” These include solar photovoltaic panels, solar thermal collectors, geothermal heat pumps, wind turbine towers, and DC-to-AC inverters that allow homeowners to pump energy back into the electric grid. There’s no cap for this exemption.
  • Property Tax Exemption for Solar Systems, New Mexico. New Mexico’s long-running property tax exemption for solar systems exempts installed residential solar photovoltaic systems from property tax assessments at the time of installation, potentially reducing homeowners’ property tax bills by hundreds of dollars each year (depending on the value of the system, value of the home, and local property tax rates).
  • Pacific Gas & Electric Residential Rebates, California. Pacific Gas & Electric, a major California utility, offers utility bill rebates to customers who purchase efficient appliances and equipment. Rebates are subject to change by year, but perennial examples include up to $120 on eligible smart thermostats.
  • Residential Energy Efficiency Loans and Rebates, Tallahassee, Florida. The city of Tallahassee offers a slew of residential energy efficiency loans and rebates covering about 25 appliances and improvements in all. Loan terms typically range from five to 10 years, carry relatively low fixed interest rates, and are secured with a property lien. To qualify, borrowers must be residential electric or natural gas utility customers. Eligible appliances and improvements include efficient natural gas dryers, natural gas ranges, refrigerators, windows, doors, pool pumps, and roofing, as well as solar photovoltaic panels and water heating systems. The maximum loan principal is $10,000.

Final Word

Green energy and energy-efficiency technology have improved drastically — and have become significantly more affordable — since the late 20th century. Thanks in part to these tax credits and incentives, the pace of these improvements has accelerated over the last decade.

Most new-construction homes contain state-of-the-art appliances, building envelope improvements, and mechanical systems. They offer a degree of efficiency and comfort that simply didn’t exist a generation ago. Most important for cost-conscious home buyers and homeowners, these systems are less expensive to install, meaning they pay for themselves faster than ever before.

There’s no guarantee current and future politicians will step up to renew expiring green energy and energy-efficiency tax credits or pass new ones into law. However, with all the strides we’ve made in recent years, it’s possible we’ve reached a tipping point at which wind, solar, and efficiency technologies no longer need substantial government support to entice buyers.

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