Energy Tax Credit

A residential energy tax credit is available to homeowners who make their homes more energy-efficient by installing certain equipment. Federal energy tax incentives and state rebates are available to many qualified homeowners. A tax credit is more valuable than an equivalent deduction because a credit reduces the tax dollar-for-dollar, whereas a deduction only removes a percentage of the tax liability. 

The residential energy tax credit is available for taxpayers through Internal Revenue Service Form 5695. The Bipartisan Budget Act of 2018 (BBA) signed into law on February 9, 2018 reinstated the nonbusiness energy property credit for 2017. It also reinstated the residential energy efficient property credit for qualified small wind energy property costs, qualified geothermal heat pump property costs and qualified fuel cell property costs to the end of 2021. These credits could be claimed on 2017 tax returns; however, taxpayers can also file an amended return via Form 1040X to receive credit. 

The energy credit is not restricted to a taxpayer’s primary residence, except for anything pertaining to fuel cells. The credit may be claimed for newly constructed homes as well. For most types of property, there is no dollar limit, or caps, on the credit. Notably, if the credit exceeds taxes owed, taxpayers can carry over the unused balance to their tax return for the following tax year. The energy tax credit could be worth up to 30 percent of the total cost of installing certain renewable energy sources. In particular, solar equipment is set to be one of the biggest energy tax credits available in 2018. This credit applies both to solar panel systems as well as solar hot water systems. Congress extended this credit at the end of 2015; taxpayers have until the end of 2019 to claim the full 30 percent. After that, the value declines by a few percentage points per year until 2022, when it goes away entirely for homeowners.

In addition to federal tax breaks, taxpayers may want to check with their local utilities about available rebates for energy efficient purchases. Many appliances, building products, electronics, heating and cooling equipment and water heaters come with rebates through local utility companies. Some rebates are available immediately after purchase, or following installation. Typically, the total rebate amount depends on the product. Department of Energy's database of energy efficiency tax credits, rebates and savings may provide further insight.