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Section 25C – Credit for Energy Efficient Home Modifications

Under Code Sec. 25C a taxpayer will be able to claim a credit for making qualifying energy saving improvements to his existing home. The dollar limits and credit percentages have been modified several times since the credit first became available in 2006.

Credit History

The credit has been available since 2006 with the exception of 2008 when there was no credit. Over the years both the credit percentages and a lifetime credit dollar limit have varied as outlined below. With the passage of the IR Act there have been some significant changes, the first being a modification in the heading for Section 25C from ‘‘non-business energy property’’ to ‘‘energy efficient home improvement credit.”

Effective

Tax Years 2006-2007 and 2009 through 2032

Credit Dollar Limits

  • For 2023 through 2032 - (Sec 25C(b); Act Sec 13301(c)) – The lifetime limit previously in effect has been eliminated and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of:
    • $600 for credits with respect to residential energy property expenditures, windows, and skylights, and
    • $250 for any exterior door ($500 total for all exterior doors)
    • Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
    • The $1,200 credit amount is increased by up to $150 for a home energy audit. A home energy audit is an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence which:
      • identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and
      • is, after 2023 (transition rule - need not be certified in 2023), conducted and prepared by a home energy auditor that meets the certification or other requirements specified by IRS. (Code Sec. 25C(e), Act Sec. 13301(f)(3)(A)) The amount of the credit allowed with respect to a home energy audit can't exceed $150. (Sec 25C(b)(6)(A), Act Sec. 13301(f)(2)) 

The IRS has released Notice 2023-59 which outlines the rules for doing home energy audits so taxpayers can claim the tax credits. The notice announces the upcoming proposed regulations and offers interim guidance regarding home energy audits for purposes of the energy efficient home improvement credit under Section 25C of the Tax Code, as well as a transition rule for certain home energy audits conducted during tax years ending in 2023.

  • For 2011 through 2022 – the credit is limited to $500 but reduced by any Sec 25C credit claimed in any prior year and subject to specific improvement limitations.
  • For 2009 and 2010 – the combined credit for both years is capped at $1,500.
  • For 2006 and 2007 the combined credit for both years is capped at $500 subject to specific improvement limitations.  

Credit Percentage Amount

Subject to the dollar limits above, the credit percentages are:

  • For 2022 through 2032 – (Sec 25C(a) Act Sec 13301(b)) - 30% of the sum of
    • The amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during that year, and
    • The amount of the residential energy property expenditures paid or incurred by the taxpayer during that year.
  • For 2011 through 2021 - 10% of the cost of qualified energy efficient improvements.,
  • For 2009 and 2010 – 30% of cost
  • For 2006 and 2007 - 100% of the cost of residential energy property expenses, limited to the dollar amounts noted for each item or category of items purchased in 2006 and 2007.

Qualifications

  • Residence must be located in the U.S.
    • After 2021 - Used as a residence by the taxpayer. Important: This is a significant change since a taxpayer can claim this credit for their residence even though they do not own the residence for years after 2021.
    • After 2024 - An item qualifying for credit is produced by a qualified manufacturer, and the taxpayer includes the qualified product ID number of the item on the tax return for the tax year. (Sec. 25C(h)(1), Act Sec. 13301(g)(1)). Omission of a correct product identification number is treated as a mathematical or clerical error.
    • Before 2022 - Owned and used by the taxpayer as the taxpayer’s principal residence (within the meaning of Sec 121), and originally placed in service by the taxpayer.
      • 5-year in service requirement (applies to building envelope components only).
      • Original use must begin with taxpayer

Basis Adjustment

The basis of the property is increased by the amount of the expenditure and reduced by the amount of the credit. (Code Sec. 25C(f)). This will generally create a different basis for federal and state purposes where the state does not provide a credit, or it differs from the federal credit amount.

Other Credit Issues

  • Non-refundable Personal Credit
  • Credit offsets AMT
  • No Carryover
  • Swimming pools - Code Sec. 25C credit doesn't have any specific prohibitions against swimming pools or hot tubs.
  • Reliance on manufacturer’s certification– A taxpayer may rely on a manufacturer’s certification that the component is eligible for the credit provided the IRS hasn’t withdrawn the certification. But note the requirement for a manufacturer’s qualified product ID number after 2024 discussed previously.

Per Item Annual Credit Limit

After 2021

The following energy efficient home improvements are eligible for the Energy Efficient Home Energy Credit (for further details see Fact Sheet 2022-40 at www.irs.gov/pub/taxpros/fs-2022-40.pdf):

  • Building envelope components satisfying the energy efficiency requirements in Q1 of the Fact Sheet under the Energy Efficiency Requirements section:
    • Exterior doors(1) (30% of costs up to $250 per door, up to a total of $500);
    • Exterior windows and skylights(2) (30% of costs up to $600); and
    • Insulation materials or systems and air sealing materials or systems(3) (30% of costs).
  • Home energy audits (30% of costs up to $150)
  • Residential energy property(4) (30% of costs, including labor, up to $600 for each item) satisfying the energy efficiency requirements in Q1 of the Fact Sheet under the Energy Efficiency Requirements section:
    • Central air conditioners;
    • Natural gas, propane, or oil water heaters;
    • Natural gas, propane, or oil furnaces and hot water boilers; and
    • Improvements to or replacements of panel boards, sub-panel boards, branch circuits, or feeders that are installed along with building envelope components or other energy property listed in the FAQs in the Fact Sheet and enable its installation and use. 
  • Heat pumps and biomass stoves and biomass boilers(5) (30% of costs, including labor) satisfying the energy efficiency requirements in Q1 under the Energy Efficiency Requirements section of the Fact Sheet:
    • Electric or natural gas heat pump water heaters;
    • Electric or natural gas heat pumps; and
    • Biomass stoves and biomass boilers.

(1) Must meet Energy Star requirements

(2) Must meet Energy Star most efficient certification requirements

(3) Must meet International Energy Conservation Code (IECC)

(4) Must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency (CEE) that is in effect as of the beginning of the year in which the property is placed in service

(5) Must have a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel)

Prior to 2022  

• Qualified Windows & Skylights  -  $200 (lifetime limit)

• Qualified Advanced Main Air Circ  -  $50

• Qualified Hot Water Boiler  -  $150

• Qualified Energy-Efficient Equip.  -  $300

Qualifying Improvements are Broken Down Into Two Categories

  • Qualifying building envelope components (Cost does not include installation costs):
    • Any insulation material or system specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit that meets the applicable Energy Star requirements (for post-2015 credit);
    • Exterior window, skylight, or door (other than a storm window or storm door) that meet the requirements of Energy Star Programs, Version 6 (for post-2015 credit);
    • Storm window or storm door – see criteria in IRS Notice
    • Before 2023: 
      • Any metal roof installed on a dwelling unit, but only if the roof has appropriate pigmented coatings specifically and primarily designed to reduce the heat gain of the dwelling unit and meets the applicable Energy Star program requirements. (Code Sec. 25C(c)(1); 25C(c)(2)(D))
      • Asphalt Roofing with appropriate cooling granules (2009, 2010, and 2011 through 2021).
    • After 2022:
      • Air sealing insulation is added to the definition of a building envelope component.(Code Sec. 25C(c), Act Sec. 13301(d))

The IR Act eliminates treatment of roofs as building envelope components after 2022.

  • Residential qualified energy property expenses - Expenses made by the taxpayer for “qualified energy property,” including labor costs properly allocable to the onsite preparation, assembly, or original installation of the property, include: (Code Sec. 25C(d))
    • Energy-efficient building property no more than $300 of the cost is credit eligible.
    • A qualified natural gas, propane, or oil furnace or hot water heater (no more than $150 of the cost is credit-eligible); or
    • An advanced main air-circulating fan no more than $50 of the cost is credit-eligible). (Code Sec. 25C(b)(3), Code Sec. 25C(d)(2))

California Differences

California has no equivalent credits. Therefore, the basis of property on which the federal credit is claimed will be different for federal and California.

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