What Home Improvements Qualify for Energy Tax Credits?
Home energy tax credits let eligible homeowners subtract part of the cost of qualified energy improvements from their federal income tax. The two main federal credits most homeowners see are the Residential Clean Energy Credit (covers solar, batteries, geothermal, small wind and fuel cells) and the Energy Efficient Home Improvement Credit (covers certain insulation, windows, doors, and efficient heating and water systems). Exact eligibility, allowed amounts and filing rules are set by the IRS and can change, so confirm details for the year you claim the credit (see IRS guidance below).
Which improvements commonly qualify
- Solar photovoltaic (PV) panels and related equipment — panels, inverters, racking and other components that are part of a qualified system (Residential Clean Energy Credit) (IRS).
- Battery storage systems charged by onsite renewable energy (often eligible when added with or after a solar system) (IRS).
- Geothermal heat pumps — qualifying closed-loop and open-loop systems that meet performance standards.
- Small wind turbines and certain fuel cells that meet EPA/IRS definitions.
- Heat pumps, high-efficiency central air conditioners, and advanced electric heat pump water heaters when they meet efficiency thresholds (often covered under the Energy Efficient Home Improvement Credit and/or other updated rules).
- Home insulation, air sealing and certain types of replacement windows and exterior doors that meet the Department of Energy (DOE) or ENERGY STAR performance criteria (may fall under the Energy Efficient Home Improvement Credit).
Note: ENERGY STAR certification alone does not guarantee a federal tax credit—products must meet the specific tax-code definitions and efficiency thresholds for the credit being claimed (IRS; DOE).
How the two credits differ (big-picture)
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Residential Clean Energy Credit: Primarily an investment-style credit that covers a percentage of the cost of qualifying clean-energy systems (solar PV, solar water heating in many cases, battery storage, geothermal heat pumps, small wind and fuel cells). Historically referred to as the Investment Tax Credit (ITC), its rates and eligibility were expanded under the Inflation Reduction Act (IRA). This credit is claimed on IRS Form 5695.
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Energy Efficient Home Improvement Credit: Covers specified efficiency upgrades (insulation, windows, doors, certain HVAC and water-heating equipment). Recent tax law updates have altered amounts, caps and how some credits are structured (annual limits versus lifetime caps). This credit also uses IRS Form 5695 but follows different line items and limits.
Because tax law updates can change covered items, percentages and limits, always confirm current-year rules before making purchase decisions (IRS Residential Clean Energy Credit page; DOE consumer guides).
Who can claim these credits
- Generally, the credits apply to U.S. taxpayers who own the home where the qualifying property is installed. The property must be a qualifying dwelling unit located in the United States and must be owned (not rented) by the taxpayer when the credit is claimed. Some credits allow second homes while others are restricted to the taxpayer’s primary residence—check the IRS rules for each credit.
- Rental property and properties used exclusively for business are usually not eligible under the residential credit rules (rental situations follow different tax treatments).
Typical documentation required
Keep careful documentation so you can substantiate the credit if the IRS asks:
- Manufacturer certifications (many products include a manufacturer statement saying the product qualifies under the tax code).
- Sales receipts and contractor invoices that separate product and labor costs, and that show installation dates.
- Model numbers and efficiency ratings (e.g., SEER for AC units, HSPF for heat pumps), and any ENERGY STAR labels.
- Proof of payment and the installer’s contact information.
- Copies of Form 5695 and your tax return in the year you claim the credit.
IRS Form 5695 instructions list the specific documentation you should keep for each claimed item (IRS: Form 5695 instructions).
How much can you save? (general guidance)
Credit amounts vary by program and by year. For example, the Residential Clean Energy Credit has historically offered a percentage of qualified costs (commonly 30% in recent years under updated federal rules), while the Energy Efficient Home Improvement Credit has different caps and per-item limits. Adders (additional credit percentages) are sometimes available for domestic content or low-income installations under newer rules.
Rather than relying on a single number, estimate savings by:
- Confirming the current-year credit percentage and any phase-down schedule on the IRS site.
- Checking for per-item dollar limits and annual caps for efficiency improvements.
- Consulting your tax advisor to see if nonrefundable vs. refundable rules or carryforward options affect your situation.
Common mistakes and how to avoid them
- Assuming any energy-efficient appliance qualifies: not all ENERGY STAR appliances are eligible. Check IRS product eligibility lists and manufacturer statements.
- Failing to separate costs: Contractors often combine labor and materials on invoices. Note that some credits only apply to equipment cost (though many credits now include installation).
- Missing product or installation deadlines: the credit applies to the tax year the equipment is placed in service, so an installation completed in January counts for that tax year when placed in service.
- Not checking local/state incentives: federal credits can interact with state rebates or utility incentives; sometimes a state rebate reduces the federal credit basis, so read rules carefully.
Real-world examples (anonymized)
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Solar + battery: A homeowner installed a solar PV system with a connected battery. Under the Residential Clean Energy Credit rules, the cost of the solar system and the battery met the credit’s definition of qualifying property. The credit reduced the homeowner’s federal tax liability by a percentage of the combined qualified costs.
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Heat pump replacement: A homeowner replaced an old electric furnace with a modern electric heat pump that met DOE efficiency thresholds. They claimed the Energy Efficient Home Improvement Credit; because the product met the technical efficiency test and they retained the manufacturer certification, the claim was supported during a subsequent review.
Each project’s details differ—keeping receipts and the manufacturer’s qualification statements is crucial.
How to claim the credit
- Use IRS Form 5695 (Residential Energy Credits) to calculate and claim eligible credits. Follow the current-year instructions for which lines to complete and how to carry forward unused credits if allowed. The IRS maintains a landing page for residential energy tax incentives with links to the Form 5695 and instructions (IRS: Residential Clean Energy Credit).
- If you use tax-preparation software or a tax professional, provide all invoices, manufacturer statements, and installation records. Your preparer will use Form 5695 to record the credit on your return.
For a step-by-step walkthrough of the filing process and sample completed forms, see our guide: How to Claim Home Energy Tax Credits: A Step-by-Step Guide (finhelp.io: https://finhelp.io/glossary/how-to-claim-home-energy-tax-credits-a-step-by-step-guide/).
State and local incentives
In addition to federal credits, many states, municipalities and utilities offer rebates, low-interest loans or tax credits for energy upgrades. For a searchable database of state and local incentives, see the DSIRE database at dsireusa.org. You can also review state lists to determine whether a state rebate affects the federal credit basis.
Professional tips for maximizing credits
- Time major projects: If you plan multiple upgrades, grouping them in the same tax year can produce a larger immediate tax benefit.
- Ask for a manufacturer qualification statement at purchase and an itemized invoice at installation.
- Check for adders or bonus credits (for domestic content or low-income installations) that can increase the federal credit amount under current law.
- Talk with a tax professional before signing large contracts—some choices (e.g., lease vs. purchase of a solar system) change whether you can claim the credit.
Frequently asked questions (short answers)
- Do I need to be the homeowner to claim the credit? Yes—credits generally go to the owner who pays for the installation. Renters are usually not eligible unless they own the improvements and qualify under special rules.
- Can I claim the credit if I sell the home soon after installation? You can claim the credit for the tax year the property was placed in service; sale timing after that does not retroactively affect an eligible claim.
- Will a state rebate reduce my federal credit? Sometimes—rules differ. Some rebates reduce the federal tax credit basis; others do not. Check the rebate terms and consult IRS guidance or a tax advisor.
Where to confirm current-year rules (authoritative sources)
- IRS — Residential Clean Energy Credit (Form 5695) and Form 5695 instructions: https://www.irs.gov/credits-deductions/individuals/residential-clean-energy-credit
- U.S. Department of Energy (consumer guidance on home efficiency and qualified equipment): https://www.energy.gov/
- DSIRE (state incentives database): https://www.dsireusa.org/
For related content on our site, see the entry on Residential Clean Energy Equity Credit (https://finhelp.io/glossary/residential-clean-energy-equity-credit/) and our step-by-step claiming guide referenced above.
Professional disclaimer: This article is educational and not tax or legal advice. Tax rules for home energy credits change frequently; consult a qualified tax professional or the IRS before relying on this information for tax filing or investment decisions.
