Frequently asked questions about energy efficient home improvements and residential clean energy property credits — Examples

These FAQs were released to the public in Fact Sheet 2022-40PDF, December 22, 2022.

Q1. Can you illustrate how the various credit limits of the Energy Efficient Home Improvement Credit operate? (added December 22, 2022)

A1. Here are a few examples to illustrate how the Energy Efficient Home Improvement Credit limits work:

Example 1. In one taxable year, a taxpayer purchases and installs the following: two exterior doors at a cost of $1,000 each, windows and skylights at a total cost of $2,200, and one central air conditioner at a cost of $5,000. All property installed meets the applicable energy efficiency and other requirements for qualifying for the Energy Efficient Home Improvement Credit.

First, 30% of each $1,000 door's costs is $300, but the per door limit of $250 applies to reduce the maximum possible credit for each door to $250 each. Thus, the taxpayer's expenditures for exterior doors potentially qualify the taxpayer to claim up to a $500 tax credit.

Next, 30% of the taxpayer's total $2,200 of expenditures for windows and skylights is $660, but the $600 limit for all windows and skylights applies to limit the taxpayer's credit for such expenditures to $600. Thus, the taxpayer's expenditures for windows and skylights potentially qualify the taxpayer to claim up to $600.

Finally, 30% of the taxpayer's $5,000 cost paid for the central air conditioner is $1,500, but the $600 per item limit for energy property applies to limit the taxpayer's credit for such expenditures to $600.

Adding these credit amounts yields a sum of $1,700 ($500 + $600 + $600), but the aggregate limit of $1,200 applies to limit the taxpayer's total amount of Energy Efficient Home Improvement Credit to $1,200.

Example 2. For this example, assume all the same facts as in Example 1 above, except that instead of purchasing and installing a central air conditioner at a cost of $5,000, the taxpayer purchases and installs an electric heat pump at a cost of $5,000. The heat pump meets the applicable energy efficiency and other requirements for qualifying for the Energy Efficient Home Improvement Credit. Here, 30 percent of the taxpayer's costs for the heat pump is $1,500, and since the heat pump is in a category of energy property exempted from both the $600 per item limit and the $1,200 aggregate limit, the taxpayer can claim an Energy Efficient Home Improvement Credit of $1,500 for the costs of the heat pump alone.

Accordingly, the taxpayer's total Energy Efficient Home Improvement Credit is $2,600 ($500 for the exterior doors + $600 for the windows and skylights + $1,500 for the heat pump).

Example 3. For this example, assume all the same facts as in Example 1 above, except that instead of purchasing and installing a central air conditioner at a cost of $5,000, the taxpayer purchases and installs an electric heat pump at a cost of $8,000. The heat pump meets the applicable energy efficiency and other requirements for qualifying for the Energy Efficient Home Improvement Credit. Assume further that the taxpayer spends $600 on home energy audits performed by a properly certified home energy auditor. On these facts, 30 percent of the taxpayer's costs for home energy audits is $180, but the $150 limit on credits for home energy audits applies to limit the taxpayer's credit for such expenditures to $150. Adding this credit amount to the credit amounts for the doors, windows, and skylights yields a sum of $1,250 ($1,100 + $150), but the $1,200 aggregate limit applies to limit the taxpayer's total potential credits for these expenses to $1,200.

Next, 30% of the taxpayer's $8,000 cost for the heat pump is $2,400, and even though the heat pump falls into a category of energy property exempted from both the $600 per item limit and the $1,200 aggregate limit, the category is still subject to a separate $2,000 aggregate limit for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers. Thus, the taxpayer can claim a $2,000 tax credit for the cost of the heat pump alone, and the taxpayer's total Energy Efficient Home Improvement Credit is $3,200 ($1,200 for the maximum allowable credit for the doors, windows, skylights, and home energy audit + $2,000 for the maximum allowable credit for a heat pump).