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What Is The Residential Renewable Energy Credit And Can I Use It In 2021?

Lauren Nowacki7-minute read
August 20, 2021

There’s no question that replacing your home’s original energy sources with renewable ones will help the environment. But did you know it will also save you on monthly utility bills?

While saving the world and saving money on bills is incentive enough, the government has also sweetened the deal by offering a residential energy credit to help offset the costs of making your home more energy-efficient.

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What Is The Residential Renewable Energy Tax Credit?

The residential renewable energy tax credit’s purpose is to incentivize homeowners to make energy-efficient upgrades to their homes. The tax credit matches dollar for dollar the costs of certain renewable energy upgrades you make to your home – up to a certain amount – and subtracts it from your taxable income.

How Does The Residential Energy Credit Work?

To receive the credit, you’ll need to file Form 5695 for the tax year that the energy-efficient upgrades are completed. So, if the upgrades were completed in 2021, you’ll file this form in 2022, when you file your 2021 federal taxes.

While new construction, existing principal and second homes qualify for most upgrades, rentals do not qualify for the credit at this time.

Keep in mind, the tax credit is really two different credits: the residential energy-efficient property credit and the nonbusiness energy property credit.

It can get a little confusing, so let’s look at both credits separately to see what upgrades to the home qualify and how much credit you can receive.

What Is The Residential Energy Property Credit?

This part of the residential renewable energy tax credit is for upgrades made to the way you power your home and may include solar, wind, geothermal and biomass technologies. These require bigger, more costly renovations to your home.

Types Of Renovations Covered

Homeowners who install certain systems and equipment to generate energy from sustainable sources qualify for the credit. These are the types of upgrades included in the tax credit.

Qualified Solar Electric

Solar panels convert the sun’s light energy into electricity. For these photovoltaic systems to qualify for the tax credit, they must be the home’s main source of electricity and meet electrical and fire codes.

The systems include solar panels that capture photons from the sun and convert their energy. Another important part of the system, the inverter, changes the electrical current into one that can power most electric devices. One other main component is the racking, which attaches the panels to the ground or roof of your home.

Some of the expenses included in this credit include:

  • Contractor labor costs
  • Permitting and developer fees
  • Inspection costs
  • System components and energy storage devices
  • Eligible expense sales tax

You cannot include costs or fees associated with financing the system, nor any structural work for normal roof function and support. However, if the structural work is installing solar roof shingles, it may qualify.

Qualified Solar Water Heating

Solar water heaters work in similar ways to solar panels, except they use the sun’s thermal energy to heat water. While designs vary, they all have a collector and storage tank and essentially use a nonfreezing liquid to move the sun’s heat to the water in the storage tank or circulate water through the collector to be heated by the sun and then transferred to the storage tank.

To qualify for the residential energy credit, the system must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state you live in.

Small Wind Energy

Using wind turbines, this upgrade converts the wind’s kinetic energy into electricity for the home. Tax credits for this system include the costs to install the wind turbine. To qualify, the turbine cannot generate more than 100 kilowatts of electricity.

Geothermal Heat Pump

Instead of using the air, geothermal heat pumps use the natural energy from the ground to heat and cool the home and the water you use. The ground is much cooler in the summer and warmer in the winter than the air, which can help save even more energy.

Here’s how the pump works. A loop of water-filled pipes is buried below the ground outside of the home. In the winter, the water moves through the pipes, absorbs the ground’s heat and transfers it to a heat pump, which uses it to warm the air before it’s circulated throughout the home. In the summer, the water carries heat from the home through the pipes and the lower temperature of the ground cools it before it’s sent back into the home.

To qualify for the credit, the geothermal heat pump must meet ENERGY STAR certification requirements.

Fuel Cell

Like batteries, fuel cells produce power without combustion or emissions. However, unlike batteries, they don’t need to be recharged. All they need is a continuous source of fuel, most commonly water.

The tax credit limit is $500 per every ½ kilowatt hour of energy generated. Only primary residences qualify.

Biomass Fuel Stoves

Newly covered for 2021, biomass fuel stoves heat water or the home by burning biomass fuel. This type of fuel creates energy from things that were once living, including burning wood, vegetation and certain fibers.

To qualify, your heating system must have a thermal efficiency rating of at least 75%. Since this is new for 2021, the IRS form that references these upgrades won’t likely be available until January 2022.

When using this type of device, make sure you’re following the EPA’s guidelines on the best wood-burning practices.

Schedule Of Authorized Tax Credits

The credit amount offered depends on when the upgrades were completed:

  • For upgrades completed by December 31, 2016, and before January 1, 2020, the credit amount is 30% of the costs, including installation.
  • For upgrades completed by December 31, 2019, and before January 1, 2023, the credit amount is 26% of the costs, including installation.
  • For upgrades completed after December 31, 2022, and before January 1, 2024, the credit amount is 22% of the costs, including installation.

If you install upgrades that are completed in 2021, your credit amount will be 26%. Remember, the tax credit for fuel cells is limited to $500 per every ½ kilowatt hour of energy generated.

Tax Credit Extension

As of right now, the tax credit has been extended retroactively through December 31, 2021.
It is unclear if it will be extended thereafter.

What Is The Nonbusiness Energy Property Credit?

The second part of the residential renewable energy tax credit is the nonbusiness energy property credit. This is a tax credit to offset the cost of energy efficiency upgrades to conventionally powered homes.

With this credit, you can get up to $500, depending on the improvement. The credit only applies to existing homes that are used as principal residences. You cannot get this tax credit for a rental or new construction home.

The IRS puts these improvements into two different categories: qualified energy efficiency improvements and residential energy property costs.

Qualified Energy Efficiency Improvements

You can claim up to 10% of the cost of these types of improvements to your home. Limits apply.

  • Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home
  • ENERGY STAR-certified exterior windows and skylights
  • ENERGY STAR-certified exterior doors
  • Metal roofs with pigmented coatings or asphalt roofs with cooling granules. These roofs must be ENERGY STAR-certified.

Please note that you cannot include installation costs for qualified energy-efficiency improvements.

Residential Energy Property Costs

You can claim up to 100% of the costs of these types of improvements. Limits apply.

  • Energy-efficient air conditioning and heating systems
  • Specific ENERGY STAR-certified water heaters that run on natural gas, propane or oil
  • Biomass fuel stoves

Limits On The Credit

The nonbusiness energy property credit is limited to a maximum value of $500 for all years combined, from 2006 to its expiration. Included in that combined $500 limit are maximum amounts for specific upgrades:

  • No more than $200 can be attributed to window upgrades
  • No more than $50 for a furnace circulating fan
  • No more than $150 for a furnace or boiler
  • No more than $300 for any other energy-efficient item

Tax Credit Extension

This credit was also extended through 2021. We’ll have to wait to see if it’ll be extended thereafter.

Calculating Your Tax Credit

To calculate your tax credit, follow these steps:

For renovations that qualify for the residential energy property credit: Add up the total costs of all of your qualifying renovations, then divide the total by the percentage that corresponds with the year they were completed. For renovations completed in 2021, you can take 26% of the costs.

Here’s an example: If it cost you $20,000 to get solar panels and a small wind turbine, your tax credit would be $5,200, which is 26% of $20,000.

You’ll do this calculation in Part 1 of Form 5695. The form will have a specific line for each qualifying upgrade. For example, Line 1 may be the amount of money you paid for solar electricity upgrades, while Line 2 is for solar water heating and Line 3 is for small wind energy property costs.

Write the amounts you paid per upgrade on each line, then add the lines together and write the total on the line provided (on the 5695 form for 2020, it’s Line 5). Then, on the next line, multiply the total by 0.26 (26%) and write the total on the line provided.

For nonbusiness energy property credit: You’ll add up the qualifying expenses for each qualifying upgrade – whether it’s 10% of the cost or 100%, depending on which category the upgrade is in. Remember, the max total you can claim is $500.

Here’s an example: If you installed new windows ($200 max) and a furnace circulating fan ($50 max), you’d get a credit for $250. Keep in mind, there is a $500 limit for all years combined. So, if you had claimed $300 the year before, you’d only be able to claim $200 this year and $0 thereafter.

This calculation is completed in Part 2 of Form 5695. This section will ask other questions, too, but when it comes to calculating your credit, it will also have specific lines for specific upgrades. Remember that some upgrades have limits below $500 and you cannot enter a value of more than that max. For example, you can only claim up to $200 for windows, so you cannot write a value of more than $200 on that line.

Refer to the IRS worksheets for further instructions and clarification. We recommend speaking to a tax professional for additional help.

The Bottom Line: The Residential Energy Credit Is One More Reason To Convert To A Sustainable Energy Source In 2021

This tax credit is the government’s way to encourage the residential shift to renewable energy. If you want to take advantage of these incentives, a cash-out refinance can allow you to use some of your home’s equity to help you pay for these upgrades.

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Lauren Nowacki

Lauren Nowacki is a staff writer specializing in personal finance, homeownership and the mortgage industry. She has a B.A. in Communications and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.