Residential Energy Tax Credits: Changes in 2023

INSIGHTi

Residential Energy Tax Credits: Changes in

2023

November 21, 2022

P.L. 117-169, commonly referred to as the Inflation Reduction Act of 2022 (IRA), expanded and extended

two nonrefundable tax credits meant to encourage individuals to invest in energy efficiency improvements

or clean energy in their homes:

1. the energy efficient home improvement credit (previously known as the tax credit for

nonbusiness energy property, Internal Revenue Code [IRC] Section 25C), which

subsidizes certain investments that reduce energy consumption in homes; and

2. the residential energy tax credit (previously, the energy efficient property credit, IRC

Section 25D), which subsidizes investments in renewable energy production at taxpayers’

residences.

The IRA also created two grants for states to establish rebate programs to subsidize expenses similar to

those covered by these credits—the HOMES rebate program and the high-efficiency electric home rebate

program. These state programs are not yet operational. The IRA does not prohibit taxpayers from

claiming both a rebate and one of the residential tax credits for the same project, although the rebate may

reduce the expenses eligible for the credit.

Energy Efficient Home Improvement Credit (Section 25C)

The Section 25C credit had expired at the end of 2021, but the IRA reintroduced the credit retroactively

for qualifying property placed in service during tax year 2022. For investments placed in service from

2023 through 2032, the credit amount is higher than it was in the past and the scope of qualifying

expenses eligible for the credit is expanded (Table 1.)

Taxpayers typically claim expenses for the credit in the year in which they install the property in their

homes. Expenses related to new home construction are claimed when “the original use of the constructed

or reconstructed structure by the taxpayer begins.” Separate from the tax credits for individuals investing

in the energy efficiency of their homes, contractors may be able to claim tax credits for constructing new

energy-efficient homes (Section 45L).

Congressional Research Service

https://crsreports.congress.gov

IN12051

CRS INSIGHT

Prepared for Members and

Committees of Congress

Congressional Research Service

2

Table 1. Major Changes to the Energy Efficient Home Improvement Credit Beginning in

2023

Element

Tax Year 2022 (Filed in 2023)

Major Changes for Tax Year 2023 and

Beyond

Rate

10%

30%

Qualifying Expenses

Qualifying energy efficiency improvements

installed during the year, and expenses related to

energy efficient property paid or incurred during

the year.

Expenses related to qualifying home energy

audits paid or incurred during the year will also

qualify.

Investments must meet energy efficiency criteria

set by statute.

The energy efficiency standards that investments

must meet to qualify will change and update

automatically in the future. Starting in 2025,

taxpayers must report their products’

identification numbers to claim the credit.

Definition of

“energy efficiency

improvements”

Improvements to heating, cooling, and waterheating equipment, and to a building’s

“envelope,” which includes the insulation

materials or systems, the roof, and exterior

doors and windows.

Investments in roofs will no longer qualify, but

certain investments in biomass stoves and airsealing material placed in service in 2023 or later

will. Improvements to, or replacement of,

panelboards, sub-panelboards, branch circuits, or

feeders also qualify beginning in 2023.

Definition of

“energy efficient

property”

Spending on heating, cooling, and water-heating

property that meets efficiency criteria.

Associated labor and installation costs also

qualify.

Expenditures must be made on the taxpayer’s

primary residence located in the United States.

Expenditures made for homes the taxpayer uses

as a residence, whether or not as their primary

residence, will qualify.

Lifetime Limit

$500 per taxpayer for the entire credit.

No lifetime limits.

$200 for windows.

Annual Limits

$300 for any single energy property item.

$150 for any qualified natural gas, propane, or oil

furnace and hot water boiler.

$50 for any advanced main air circulating fans.

$1,200 for the entire credit for most taxpayers.

$600 for any single energy property item.

Notwithstanding these limits, the credit for

qualifying expenditures on biomass stoves or

water heaters and/or heat pumps powered by

electricity or natural gas is capped at $2,000.

$600 on windows.

$150 for home energy audits.

$500 for exterior doors in the aggregate, and

$250 per exterior door.

Expiration

The credit expired at the end of 2021. The IRA

extended it, with 2021 parameters, for 2022.

The credit will expire after 2032.

Source: CRS analysis of IRC Section 25C and P.L. 117-169.

Notes: The Section 25C credit is claimed on Form 5695. The instructions give taxpayers additional information regarding

eligibility for the credit.

Residential Energy Property Credit (Section 25D)

Through 2019, taxpayers could claim a Section 25D credit worth up to 30% of qualifying expenditures.

The credit’s rate was scheduled to be reduced to 26% through 2022 and 22% in 2023, expiring after 2023.

The IRA restored the 30% credit for the 2022 tax year and made battery storage technology placed in

service in 2023 or later eligible (Table 2).

Congressional Research Service

3

Table 2. Major Changes to the Residential Energy Property Credit Beginning in 2023

Element

Major Changes in Tax Year 2023 and

Beyond

Tax Year 2022 (Filed in 2023)

Rate

30% for all qualifying investments placed in

service in 2022.

30% in 2023 through 2031. The credit’s rate is

scheduled to fall to 26% in 2032 and 22% in

2034.

Qualifying expenses

Qualifying expenditures on residential solar

electric property, solar water heating property

(used for purposes other than heating swimming

pools or hot tubs), geothermal heat pumps, small

wind energy property, biomass stoves, and fuel

cell power plants.

Biomass stoves will no longer qualify (qualify

under Section 25C instead). Battery storage

property placed in service in 2023 or later is

eligible.

Costs associated with onsite preparation,

installation, and assembly also qualify.

The credit for fuel cell property is capped at

$500 per half kilowatt (kW) of capacity.

Qualifying property must be used in connection

with a residence of the taxpayer located in the

United States.

Expiration

The credit had begun phasing out and was

scheduled to expire at the end of 2023.

The credit is scheduled to begin phasing out in

2032 and expire after 2034.

Source: CRS analysis of IRC Section 25D and P.L. 117-169.

Notes: The Section 25D credit is claimed on Form 5695. The instructions give taxpayers additional information regarding

eligibility for the credit.

Author Information

Brendan McDermott

Analyst in Public Finance

Disclaimer

This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff

to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of

Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of

information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.

CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United

States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,

as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the

permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

IN12051 · VERSION 1 · NEW