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What Is The 2022 Residential Energy Credit And How Can You Qualify?

Carey Chesney7-minute read
April 12, 2022

Do you like helping the environment and saving money? Well, you might be able to do both at the same time with the Residential Energy Credit!

Fossil fuels are finite and often have price volatility. You’ve probably noticed a price hike if you’ve been to the pump to gas up lately. One way to combat this is to make improvements to your home that will focus on reducing your energy consumption and utilizing renewable energy sources instead of fossil fuels.

The good news is you don’t have to foot the entire bill for a more energy-efficient home. The U.S. government will help pay for these improvements through the Residential Energy Credit.

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What Is The Residential Energy Credit?

The Residential Energy Credit was created to reward taxpayers for switching to alternative energy sources and using more efficient appliances, like solar water heaters or geothermal heat pumps.

The tax credit matches the costs of certain renewable energy upgrades you make to your home – up to a certain amount – and subtracts it from your taxable income. “But do I qualify?” you may be wondering.

According to the U.S. Department of Energy, the Residential Energy Efficiency Property Credit can be claimed for solar, wind, and geothermal equipment installed in your principal residence or a second home. Fuel-cell equipment, however, only qualifies if it’s installed in your principal residence.

The Residential Energy Credit was first created by The Energy Policy Act of 2005, providing 10 percent of the cost to install energy efficient home improvements, up to a total credit of $500. Over the years, the credit has been increased to match what you pay dollar for dollar, with the total credit limits still intact. The Internal Revenue Service (IRS) offers this as a federal tax credit.

How Does The Home Energy Credit Work?

You’re probably thinking, “This all sounds great, but how do I do it?” As a homeowner, you will need to fill out a Form 5695 for the tax year that your energy upgrade was made and submit it when you complete your tax return. The good news is there’s plenty of time to plan and install your improvements, as the Residential Renewable Energy Tax Credit has been extended through 2023.

There are two separate credits you can qualify for, depending on the home improvements you’ve made: 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.

Residential Energy Property Credit

The Residential Energy Property 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.

Qualifying Upgrades

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 that the Residential Energy Credit covers for solar panels include:

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

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

Additional Details

The amount of credit you get at tax time is dependent on when you made the improvements. Here is the schedule for claiming the Residential Energy Property Credit:

  • The credit covers 30% of the cost, including installation, through 2019.
  • The credit covers 26% of the cost, including installation, through 2022.
  • The credit covers 22% of the cost, including installation, through 2024.
  • That there is no limit on credits for solar, wind and geothermal.

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

Many improvements are eligible for the Nonbusiness Energy Property Credit, including:

Residential Energy Property Costs

Here are the costs that are covered by the Nonbusiness Energy Property Credit:

Additional Details

As great as these credits are, there are some limits, including:

  • $500 for improvements made to your principal residence
  • $200 for energy efficient window upgrades
  • $50 for adding a furnace circulating fan
  • Credits are not applicable to rental properties or vacation homes
  • This program ended December 31, 2021, but you can still claim it this year on your income tax return.

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How To Calculate The Residential Energy Credit

To calculate your tax credit, follow these steps:

1. Add up the total costs of all of your qualifying renovations

2. 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:

1. 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. It’s also a good idea to ask a tax professional for additional help.

The Bottom Line: Using A Homeowners Energy Tax Credit Can Make Efficiency Upgrades More Affordable

The Residential Energy Credit, consisting of The Residential Energy-Efficient Property Credit and the Nonbusiness Energy Property Credit helps the earth and your wallet at the same time.

By making qualifying home upgrades, these tax credits can help you rely more on renewable energy sources and save each month on your utility bills.

Ready to learn more? Consider reading about green homes and how to create one.

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Carey Chesney

Carey Chesney brings a wealth of residential and commercial real estate experience to readers as a Realtor® and as a former Marketing Executive in the fields of Health Care, Finance and Wellness. Carey is based in Ann Arbor and attended the University of Wisconsin-Madison, where he majored in English, and Eastern Michigan University, where he recieved his Masters in Integrated Marketing & Communications.