Energy Efficient Home Improvement Credit (Tax Year 2024)

Quick Facts

• Credit rate: 30% of qualified energy-efficiency improvements installed in a primary residence in 2024.
• Annual caps: Up to $1,200 per year in combined credits for energy property and upgrades (with sub-limits like $600 for exterior windows and $250 per exterior door), plus a separate $2,000 cap for qualified heat pumps, heat pump water heaters, and biomass stoves or boilers.
• Eligible improvements: Insulation, air sealing, exterior doors and windows, electric panel upgrades, energy-efficient HVAC systems, certain home energy audits, and more when they meet IRS criteria.
• How to claim: File Form 5695, Part II, with your 2024 federal tax return and retain manufacturer certification statements.
• Key resources: IRS guidance on energy-efficient home improvements and Notice 2023-59, which clarifies eligibility and equipment standards.

Program Overview

The Inflation Reduction Act expanded and renamed the Nonbusiness Energy Property Credit as the Energy Efficient Home Improvement Credit starting in tax year 2023. For 2024, homeowners can again claim a credit equal to 30% of eligible costs for improvements that lower household energy use. Unlike the pre-2023 version, the new credit resets annually through 2032, allowing homeowners to spread projects over multiple years and claim credits each year. Because the benefit is a direct credit against tax, it can significantly reduce out-of-pocket costs for upgrades that cut utility bills and improve comfort.

Eligible Properties

• Primary residence: The home must be owned by the taxpayer and used as a principal residence in the United States. Rentals and second homes do not qualify for the Energy Efficient Home Improvement Credit (although the Residential Clean Energy Credit may apply to second homes for certain renewable equipment).
• Existing homes only: New construction does not qualify. Improvements must be installed in an existing home.
• Mixed-use properties: If part of the home is used for business (e.g., a home office), only the portion of expenses allocable to residential use qualifies unless business use is less than 20%.

Qualifying Expenses and Limits

The credit is subject to annual dollar limits and item-specific caps. Examples for 2024 include:

Labor costs count for certain improvements (e.g., HVAC equipment, heat pumps) but not for building envelope materials like insulation or windows. Manufacturer certification statements, invoices, and installation receipts are critical documentation.

Claiming the Credit

1. Collect documentation: Obtain manufacturer certification statements, product labels, and contractor invoices specifying installation dates and costs. Keep proof of payment (bank statements, credit card receipts).
2. Confirm standards: Ensure equipment meets the IRS-listed efficiency criteria. For example, heat pumps should be rated at least CEE Tier 2. Refer to Notice 2023-59 for detailed definitions.
3. Complete Form 5695 Part II: Enter costs in the applicable lines (e.g., line 20a for insulation, line 20b for exterior doors). Calculate the credit by applying the 30% rate and respecting individual and overall caps.
4. Transfer to Form 1040: The resulting credit flows to Schedule 3 (Form 1040), line 5, and then to Form 1040, line 20, reducing your total tax.
5. Retain records: Maintain documentation for at least three years in case the IRS requests proof of compliance.

Strategic Planning

• Phase projects across years: Because the credit resets annually through 2032, consider staging improvements to maximize the credit each year. For example, claim insulation and door upgrades in 2024 and window replacements in 2025.
• Pair with utility rebates: Many state energy offices and utilities offer rebates for the same improvements. Credits do not reduce the amount of expenses eligible for rebates, but you must subtract any tax-free rebates from the costs used to compute the credit.
• Coordinate with the Residential Clean Energy Credit: Solar panels, geothermal systems, and battery storage qualify for a separate 30% credit with no annual limit. Plan projects strategically to leverage both credits when modernizing a home.
• Consider home energy audits: A professional energy audit can identify high-impact upgrades and qualifies for a $150 credit, effectively discounting the audit cost.

Compliance and Documentation Tips

• Save product literature showing efficiency ratings (e.g., SEER2 for air conditioners, U-factor for windows).
• If the contractor provides a bundled invoice, request line-item detail to separate qualifying materials and labor.
• For electrical panel upgrades, documentation should confirm the panel supports at least 200 amps and is installed alongside other qualifying improvements.
• Maintain copies of Notice 2023-59 or IRS webpage screenshots in case equipment standards are updated after installation.

Impact Examples

• Heat pump installation: A homeowner installs a $10,000 qualified air-source heat pump in 2024. The credit equals 30% ($3,000) but is capped at $2,000 for heat pumps. If the homeowner also replaces windows costing $4,000, the 30% credit would be $1,200, but the combined envelope limit (including windows) caps the annual amount at $1,200. The total credit for the year would be $3,200 ($2,000 heat pump + $1,200 windows).
• Energy audit plus insulation: Spending $500 on a qualified audit and $2,000 on insulation yields a credit of $150 (audit) + $600 (30% of $2,000) = $750, subject to the $1,200 annual cap.

Frequently Asked Questions

Can I claim the credit if I receive a state rebate? Yes, but reduce the qualifying expense by the amount of any tax-free rebate or subsidy. For example, a $2,000 rebate on a $8,000 heat pump reduces the eligible cost to $6,000, yielding an $1,800 credit (capped at $2,000).

Do DIY projects qualify? Materials you purchase for do-it-yourself installation can qualify (e.g., insulation), but labor you perform yourself is not counted. Keep receipts from retailers and ensure products meet efficiency standards.

Can landlords claim the credit? Generally no. The credit is limited to property used as a personal residence. Landlords may explore depreciation or the Energy Efficient Commercial Buildings Deduction for rental properties.

Are roofs covered? Only certain roof components that act as insulation (e.g., metal roofs with appropriate pigmented coatings or asphalt roofs with cooling granules) may qualify; standard roof replacements typically do not. Check manufacturer certifications.

Is there an overall lifetime cap? No. The previous $500 lifetime limit is gone. The credit resets every year through 2032, allowing repeat claims if annual limits are respected.

References

• Energy Efficient Home Improvement Credit – IRS.gov
• Notice 2023-59 equipment requirements
• Form 5695 and instructions
• ENERGY STAR Rebate Finder

Insider Tips to Win Energy Efficient Home Improvement Credit

• Match upgrades to credit caps. Use the annual dollar limits for heat pumps, windows, and energy audits to prioritize spend.
• Collect manufacturer certifications. Retain product documents proving ENERGY STAR or other qualifying standards.
• Plan multi-year projects. Stage improvements over several tax years to maximize the $1,200 aggregate credit allowance.