How to Get Tax Credits for Insulation and Home Energy Upgrades

There's been a lot of buzz about the newly expanded federal tax credit for solar panels.

And while that is a big deal, it's not the only financial benefit tucked into the Inflation Reduction Act. The federal legislation includes a long list of tax credits to help homeowners afford everything from new insulation to electric appliances.

"When it was passed last summer, it was billed as the biggest clean energy bill in the history of the country," said Mark Luscombe, a certified public accountant and principal analyst at Wolters Kluwer Tax & Accounting.

So what exactly is in there for you? We talked to a tax expert to get the rundown on the credits that promise to make your next home energy upgrade a lot cheaper.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a piece of federal legislation passed in August 2022 that included $370 billion in clean energy investments. Despite its name, it's largely seen as a climate change law that will accelerate the United States' transition away from fossil fuels.

The flagship home energy discount included in the IRA is the residential clean energy credit, which offers homeowners 30% off the cost of new, qualified clean energy improvements like solar panels. 

But that's not the only discount you should know about. 

Tax credits and rebates for home energy efficiency

The credits in the IRA fall mainly into two categories: the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit. Think of them as big umbrellas that cover a whole array of potential home energy investments.

Many of the credits here already existed in the tax code, but Luscombe said the IRA "made them, in general, more generous."

Here's a full breakdown of what's available:

Energy Efficient Home Improvement Credit

This credit is geared toward helping you insulate the "building envelope" of your home (making it more efficient), and outfit it with new heating or cooling systems.

When it comes to the building envelope, this credit can help you afford:

• Exterior doors
• Exterior windows or skylights
• Insulation and air-sealing materials or systems

And it also covers "residential energy property," a fancy way of referring to some of the improvements you can make inside your home, including:

• Central air conditioners
• Water heaters (heat-pump or natural-gas varieties)
• Air-source heat pumps 
• Gas and oil hot water boilers (though only high-efficiency models)
• Electrical components needed to support these systems, including new wiring and electrical panels

Finally, the Energy Efficient Home Improvement Credit can also cover the cost of a "home energy audit," where a professional can help you figure out what improvements your home needs in the first place.

Now you know what the EEHIC covers -- but how much does it cover? Well, the credit can cover up to 30% of these energy improvements, within certain limits:

• Up to $1,200 a year for residential energy property items, but there are sub-limits for doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
• Up to $2,000 a year for qualified heat pumps, biomass stoves or biomass boilers

Each product and improvement has a specific limit within this credit, so double check before you invest in any particular project.

Residential Clean Energy Credit

This is the other big bucket of tax credits available in the IRA, focused on sources of renewable energy for your home. 

The most popular item this credit covers is solar, but here's the full list of renewable energy  products that qualify:

• Solar electric panels
• Solar water heaters
• Wind turbines
• Geothermal heat pumps
  
• Fuel cells
• Battery storage technology

For all of these, you can also apply the credit to the costs of labor, piping or wiring that are required to connect the energy system to your home.

This credit is also very generous, covering up to 30% of the cost of any of these improvements, with no monetary cap. "There is no upper limit on these," Luscombe said.

The 30% credit will last until 2032, at which point it begins phasing down each year, according to Luscombe.

High-Efficiency Electric Home Rebate Act

In addition to the tax credits, there's also a new rebate program that was created by the IRA, called the High-Efficiency Electric Home Rebate Act.

The rebates cover a group of specific home energy products that overlaps with some of the tax credits. Here's what's eligible:

• Air-source heat pumps ($8,000 limit)
• Heat pump water heaters ($1,750 limit)
• Electric stoves and cooktops ($840 limit)
• Heat pump clothes dryer ($840 limit)
• Breaker box ($4,000 limit)
• Electric wiring ($2,500 limit)
• Insulation and weatherization ($1,600)

Unlike the tax credits, these rebates are based on your income level: If you make less than 80% of your area's median income, you can receive a rebate for the entire cost of the product. If you make 80 to 150% of the median income, the rebates will cover half the product cost. 

How to take advantage of a tax credit

A 30% discount sounds well and good, but how do you actually claim it?

Well, it's fairly simple. The year after you make one of these qualifying home energy improvements (i.e. filing taxes for the year you made the improvement), you'll want to fill out the IRS Form 5695, Residential Energy Credits.

Because the credit reduces your tax bill, you won't necessarily "receive" anything. But when you file your taxes, the credit will reduce your tax bill for that year.

If you use software like TurboTax, it's even simpler. The system will ask you if you've made any home energy investments in the last year, and you check the box if you have.

An important caveat: If you're using both a tax credit and a rebate, you'll have to subtract the rebate amount from the project cost before you apply the tax credit, according to Luscombe.

How to know what your home needs

Remember that home energy audit I mentioned? For a lot of homeowners, that's the first step in their journey toward making energy upgrades.

A home energy audit can help you identify energy efficiency needs: Maybe you've got drafty doors or windows, or need better insulation in the attic. Generally, you'd want to seal up those issues before moving on to bigger projects, like a new home energy system in the form of solar or geothermal.

If you don't want to schedule a home energy audit, you could also try to DIY something similar. A thermal camera, for example, could help you identify energy leaks in your home.