April 28, 2024

Take advantage of new tax incentives for home improvements



The Inflation Control Act of 2022 offers significant tax breaks to homeowners who comply with the rules. Most of the tax breaks will begin in late 2023 or early 2024 and continue through 2032.

The tax break is designed to encourage people to make their homes more energy efficient and reduce their use of fossil fuels.

Known as the Section 25C Energy Efficient Home Improvement Credit, the program is largely administered by states under guidelines issued by the Department of Energy in July 2023. States have some flexibility, so the amount you can save varies depending on where you live. And while the tax credit decreases as your income increases, it doesn't go away.

Generally, you can get a tax credit equal to 30% of the cost of qualified improvements, up to certain limits that vary by the type of improvement and your income. This new tax credit can be combined with existing tax credits for energy-related home improvements.

The first step is to get a comprehensive home energy audit: Unless you get a home energy audit that meets guidance issued by the IRS in September 2023, you won't be eligible to receive most of the new credits.

If no remediation is made, you will still be given a 30% credit on the audit fees up to a maximum of $150 (30% of $500).

The audit report must be comprehensive, in writing, follow the process in the IRS guidance, identify the most significant and cost-effective energy efficiency improvements that can be made to the home, and include estimates of the energy and cost savings for each improvement considered.

The auditor must be qualified to carry out a home energy audit and must communicate that the audit and the auditor are qualified under section 25C of the Tax Act.

In addition to the dollar limits for each type of improvement, there are annual limits on the total amount of deductions per taxpayer, which vary by income level. The annual limits require some taxpayers to spread their improvements over several years.

The mix of tax credits and their limitations can be complicated, so apps have been developed to help homeowners track and plan for improvements, such as Green Door and Rewiring America's Inflation Reduction Act Calculator. I haven't used any of these apps yet, but they're worth considering.

For more information on deductions, search for “Deductions and Credits Under the Inflation Reduction Act of 2022” on the IRS website or visit this page on the IRS website.


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