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The Internal Revenue Code (IRC) Section 25C credit, also known as the Energy Efficient Home Improvement Credit, is a valuable tax incentive for homeowners who make qualifying energy-saving improvements to their existing homes. This credit has undergone several changes since its inception in 2006, with major updates introduced by the Inflation Reduction Act (IR Act). It’s important not to confuse this credit with the one for home solar systems, which falls under Section 25D of the tax code.
This article provides a detailed overview of the Section 25C credit, covering credit percentages, qualified items, annual limits, home energy audits, eligible homes, basis adjustments, and more.
Credit Percentage
For the years 2022 through 2032, the credit is 30% of the amount paid or incurred by the taxpayer for qualified energy-efficient improvements installed in their principal residence.
Eligible Items and Per Item Annual Limits
The following energy-efficient home improvements qualify for the Energy Efficient Home Improvement Credit:
Components Subject to a $1,200 Annual Aggregate Credit Limit:
Windows and Skylights: $600 annual limit.
Exterior Doors: $250 per door, with a maximum of $500 for all exterior doors.
Central Air Conditioners, Natural Gas, Propane, Oil Water Heaters, and Furnaces: $600 annual limit.
Components Subject to a $2,000 Annual Aggregate Credit Limit:
Heat pumps, biomass stoves, and boilers.
Home Energy Audits
Taxpayers can claim 30% of the cost of a home energy audit, up to a $150 annual limit. This audit must be performed by a certified home energy auditor and provides an inspection and written report that identifies the most cost-effective energy-saving improvements for the home.
Annual Credit Limits: $1,200 vs. $2,000
The Section 25C credit has two main annual limits:
$1,200 Annual Limit: This applies to most energy-efficient improvements like windows, skylights, exterior doors, and residential energy property. This limit can be increased by $150 if a home energy audit is conducted, bringing the total to $1,350.
$2,000 Annual Limit: This limit applies specifically to heat pumps, heat pump water heaters, biomass stoves, and boilers.
Qualifying Homes
The credit applies only to components installed in or on a dwelling unit located in the U.S. For energy-efficient building envelope components like insulation, windows, and doors, the taxpayer must both own and use the home as their principal residence. The energy-efficient components must be expected to remain in use for at least five years.
For residential energy property like water heaters, heat pumps, and furnaces, the taxpayer must use the home as a residence but doesn’t need to own it or use it as their principal residence.
Manufactured Homes: A "dwelling unit" includes a manufactured home that meets Federal Manufactured Home Construction and Safety Standards (Sec 25C(c)(4)).
Original Use: The original use of the components must begin with the taxpayer.
Basis Adjustment Requirements
The basis of the property is adjusted based on the expenditure and the credit. The property’s basis is increased by the amount of the expenditure but reduced by the credit amount. This can result in different basis calculations for federal and state taxes if the state credit differs from the federal one or if no state credit is available.
Nonrefundable Credit, AMT, and Carryover
The Section 25C credit is a nonrefundable personal credit, which means it can reduce the taxpayer's liability to zero but cannot generate a refund. It can also offset the Alternative Minimum Tax (AMT). However, unused credits do not carry over to future years and must be used in the year claimed.
Manufacturer’s Certification and Qualified Product ID Number
Taxpayers can rely on a manufacturer’s certification to determine whether a component qualifies for the credit, as long as the IRS has not withdrawn the certification. Starting in 2024, taxpayers must include the qualified product ID number of the item on their tax return. Failure to provide the correct number will be considered a mathematical or clerical error by the IRS.
Differences Between Section 25C Credit and Rebates
The Section 25C credit is a federal tax credit claimed on the taxpayer’s tax return for the year the installation is made. In contrast, rebates are cash incentives provided by manufacturers, utilities, or government programs. Rebates reduce the out-of-pocket cost of the improvement, which in turn lowers the amount eligible for the credit. For example, if a taxpayer receives a rebate on an energy-efficient window, the rebate amount must be subtracted before calculating the credit.
Installation Costs
For certain items, the Section 25C credit covers both the cost of installation and materials. Specifically:
Residential Energy Property: This includes items like heat pumps and biomass stoves. The credit covers 30% of the costs, including labor, up to $600 per item.
Building Envelope Components: This includes items like insulation, windows, and doors. For these items, only the cost of materials qualifies for the credit, not the installation labor.
Planning Modifications to Maximize Credits
Homeowners can maximize their credits by spreading out energy-efficient improvements over several years. By doing so, they can take advantage of the annual credit limits each year.
The Section 25C credit provides substantial tax savings for homeowners investing in energy-efficient home improvements. By understanding the various requirements, homeowners can make informed decisions to maximize their tax benefits. Whether it's a home energy audit, upgrading a heating system, or installing new windows, the Section 25C credit offers a valuable incentive for reducing energy costs and enhancing home efficiency.
For more information on how you might benefit from this credit, please contact our office.
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