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

Updated FAQs were released to the public in Fact Sheet 2024-15 PDF, April 17, 2024.

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 cost 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% 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 cost 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% 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).