Perhaps Your Last Chance for Home Energy Improvement Tax Credits - MABE International Advisors

Jul 09 2025 19:33

Theres a new sheriff in town, and he wants to do away with home energy improvement tax credits.

If he gets his way, you have until December 31, 2025, to get your upgrades in place and qualify for the credit. The clock ticks.

What are these credits, and how do they work?

Lets say you own your main personal residence and a vacation home. You want to save on utility costs for these properties by installing various improvements such as upgraded insulation, new windows, and new furnaces. Good idea!

And the tax law can help you by providing an energy-efficient home improvement credit of up to $3,200 per year for these and other items.

A $3,200 tax credit may not sound like much. But if youre in the 24 percent income tax bracket, its equivalent to an almost $13,400 tax deduction.

Unfortunately, the rules are a bit complex.


$1,200 Annual Credit for Energy Improvements to Your Main Home.


First, there is an annual credit capped at $1,200 for two categories of improvements:

1. Qualified energy efficiency improvements
2. Residential energy property expenditures

These must be new improvements that are reasonably expected to last at least five years.

The credit does not carry over to future years and is non-refundable (meaning that its limited to your annual tax liability).

As the law exists today, you can take the $1,200 credit every year, and there is no lifetime limit. So you can spread out your improvements over several years to enable multiyear credits. These credits are scheduled to last through 2032, albeit proposed legislation could end the credits this year.

Tax reform alert. Section 112005 of H.R. 1 (One Big Beautiful Act) passed by the House on May 22, 2025, repeals this credit for property placed in service after December 31, 2025. Section 70505 of the U.S. Senate July 1, 2025, passed version of H.R. 1 does the same.

Updated July 5, 2025: The U.S. House of Representatives passed the Senate version on July 3. The president signed the new law (One Big Beautiful Bill Act) on July 4.

Key point. To ensure a 2025 tax credit, you likely dont have much time to install the improvements.

Energy efficiency improvements. The energy-efficient home improvement credit is available for new improvements to the building envelope of your home that make the entire home more energy efficient. These are:


·Exterior windows and skylights. The credit is equal to 30 percent of what you pay for windows and skylights, up to an annual maximum credit of $600 for all windows and skylights.
 
 
·Exterior doors. The credit is equal to 30 percent of what you pay for exterior doors, capped at $250 for each door and $500 for all the doors you install.
 
 
·Insulation. This credit is for insulation or air sealing (also called weatherization). It includes costs for insulation rolls and batts; blown-in insulation fibers; rigid boards of insulation; spray foam insulation; and weatherization supplies such as specialized caulk, tape, spray foam, and sealants. But you cant get the credit for drywall or siding. This credit is equal to 30 percent of the cost of the insulation. It does not have its own annual cap but must come within the $1,200 annual cap for all building envelope improvements.
 

These credits are for improvements to your main home only. Your main home may be a house, houseboat, mobile home, cooperative apartment, condominium, or manufactured home. New construction doesnt qualify for these credits.

The credit is not available for business property. If you use your main home for businessfor example, if you work out of a home officeyoure still entitled to the full credit if your business use takes up less than 20 percent of your home.

If you use more than 20 percent of your home for business, you must reduce your credit by the business use percentage.

The credit may not be claimed by landlords unless they reside in the property that they rent. However, homeowners who rent their homes part-time through Airbnb and similar rental platforms can claim the credit. Theyll get the full credit if they rent their property less than 20 percent of the time, or a prorated credit if they rent it more than that.

The credit is based on the purchase price of the improvement. Dont include costs for on-site preparation, assembly, or installation.

Exterior windows, skylights, and doors must meet Energy Star requirements, while insulation must meet criteria established by the International Energy Conservation Code. You can rely on a manufacturers certification in writing that a building envelope component is eligible for the credit.

Don’t attach the certification to your return. Keep it for your records.

Starting in 2025, each component will have to contain a serial number (or PIN) that youll have to list on IRS Form 5695.

Residential energy property expenditures. Also falling within the annual $1,200 credit are expenses for certain types of residential energy property. These are energy-efficient components that heat water, or heat and/or cool the air, inside your home. You must use the home as your residence, but it need not be your principal residencefor example, it can be a vacation home.

The credit is equal to 30 percent of the cost, up to $600, for each of the following components:

· Central air conditioners
 
· Natural gas, propane, or oil water heaters
 
· Natural gas, propane, or oil furnaces and hot water boilers
 
· Improvements to, or replacement of, home electric panelboards, sub-panelboards, branch circuits, or feeders to at least 200 amps if necessary to install qualified energy efficiency improvements or other residential energy property.
 

Air conditioners, heaters, furnaces, and boilers must meet the highest efficiency tier (not including advanced tiers) established by the Consortium for Energy Efficiency (CEE).

Home energy audits. Also coming within the $1,200 annual credit are home energy audits. This is an inspection by a qualified home energy auditor (or under the supervision of an auditor) to identify the most cost-effective energy improvements for your home. The auditor must be certified by a Qualified Certification Program and provide you with a written report. Such audits are not required in order to obtain the other creditsthe audits are purely voluntary.

This credit is equal to 30 percent of the cost of the audit, up to a $150 annual cap.


$2,000 Annual Credit for Residential Energy Property for Your Main or Second Home.


You can also get a separately calculated annual credit of up to $2,000 for installing new energy-efficient components that heat water, or heat and/or cool the air, inside your home. Like the $1,200 credit, this credit is non-refundable and may be taken every year with no lifetime limit should the new tax reform not eliminate it for future years.

This credit is available for both your main home and a second or vacation home. The credit is based on the purchase price of the improvement plus costs for on-site preparation, assembly, or installation.

This credit is equal to 30 percent of the cost of installing:

·electric or natural gas heat pumps;
 
· electric or natural gas heat pump water heaters; and
 
·biomass stoves and boilers (stoves and boilers powered by wood or pellets).
 

Heat pumps and water heaters must meet the highest efficiency tier that has been established by the CEE that is in effect as of the beginning of the calendar year in which the property is placed in service. Biomass stove or biomass boilers must have a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).

Tax reform alert. Section 112005 of the House bill, which now sits before the Senate, repeals this credit for property placed in service after December 31, 2025. Section 70505 of the Senate Finance Committee bill terminates this credit 180 days after the date of enactment of the new tax law.

Key point. To ensure a 2025 tax credit, start now. You dont have much time to install the improvements.


Impact of Subsidies and Rebates


You can often get a subsidy or rebate from your public utility or others for installing energy improvements in your home. Public utility subsidies for installing qualified energy efficiency improvements or residential energy property must be subtracted from your cost for purposes of calculating the federal credit. Thus, they could reduce your credit. This is true whether the subsidy comes directly to you or to a contractor on your behalf.

Rebates are also subtracted from the cost of the component if the rebate:

·is based on the cost of the property,
 
·comes from someone connected to the sale, such as the manufacturer, distributor, seller, or installer; and
 
·isnt given as payment for services you provide.
 
 

Claiming the Credits


To claim the credits, you must complete and file IRS Form 5695, Residential Energy Credits, with your tax return.18 File this form and claim the credits the year the property is installed.

Example, part 1. In 2025, Helga Homeowner purchases and installs the following in her main home:

·Two exterior doors at a cost of $1,000 each
 
·Windows and skylights at a total cost of $2,200
 
·One central air conditioner at a cost of $5,000
 

Heres how her credit works:

·First, 30 percent of each $1,000 doors cost is $300, but the per-door limit of $250 applies to reduce the maximum possible credit for each door to $250.
 
·Next, 30 percent of Helgas total $2,200 cost for windows and skylights is $660, but the $600 limit for all windows and skylights applies to limit her credit to $600.
 
·30 percent of the $5,000 cost for the central air conditioner is $1,500, but the $600-per-item limit for energy property limits her credit to $600.
 

Adding these credits together amounts to $1,700 ($500 + $600 + $600), but the annual $1,200 cap applies to limit Helgas total energy efficient home improvement credit for her main home to $1,200.

Example, part 2. Helga also installs an electric heat pump in her vacation home (which she rents 10 percent of the time as an Airbnb) at a cost of $8,000. She also spends $4,000 to upgrade the insulation in her vacation home.


Thirty percent of the $8,000 cost of the heat pump for Helga’s vacation home is $2,400. The heat pump is in a category of energy property exempt from both the $600 per item limit and the $1,200 annual cap. However, the heat pump is still subject to the separate $2,000 annual cap for electric or natural gas heat pumps and heat pump water heaters, and biomass stoves and boilers. Thus, Helga can claim a $2,000 tax credit for the cost of the heat pump alone.

Helga gets no credit for installing new insulation in her vacation home since the credit for insulation is available only for a taxpayer’s main home.

Helgas total energy-efficient home improvement credit for 2025 is $3,200 ($1,200 for the doors, windows, skylights, and air conditioner + $2,000 for the heat pump).

If this law does not change, the credit resets every year, so Helga can get up to a $3,200 credit in 2026 or later years if she makes additional energy improvements.



Takeaways


Here are six takeaways from this article:

1.Homeowners can qualify for an annual tax credit of up to $3,200 by making various energy improvements to their main home (and for certain improvements to their second home).
 
2.An annual credit of up to $1,200 is available for installing the following in your main home: new exterior doors; windows and skylights; insulation; central air conditioners; natural gas, propane, or oil water heaters; furnaces and boilers; electric panels. The credit is limited to $250 for each door (up to $500) and $600 for the other components except for insulation.
 
3.An annual credit of up to $2,000 is available for installing electric or natural gas heat pumps or water heaters and biomass stoves and boilers. This credit is available for installations in your main home or a second home.
 
4.Homeowners may also claim a credit of up to $150 if they hire a qualified home energy auditor to inspect their home and identify the most cost-effective energy improvements they could make. Such audits are purely voluntary.
 
5.These credits do not carry over to future years and are non-refundable (that is, they are limited to your annual tax liability).
 
6.This year, 2025, could be your last year to claim the credits. H.R. 1 passed by the House and now by the Senate eliminates the credit for property placed in service after December 31, 2025. Its not law yet, but its a sign for you to act now.