With ongoing climate-conscious legislation in the US, homeowners investing in renewable energy sources like solar, wind, or geothermal systems can benefit from the Residential Clean Energy Credit, a key component of federal tax incentives available through 2034.
How much is the Residential Clean Energy Credit?
The Residential Clean Energy Credit allows qualifying homeowners to claim 30% of the cost of eligible clean energy installations on their tax return. This includes costs associated with solar electric systems, solar water heaters, small wind turbines, geothermal heat pumps, fuel cell systems, and even battery storage with at least a 3-kilowatt capacity. Initially set at 30% from 2022 to 2032, the credit reduces to 26% for systems installed in 2033 and 22% in 2034.
For example, if you install a solar system with an $18,000 upfront cost, you could claim $5,400 as a tax credit, reducing your out-of-pocket expense to $12,600. Notably, there are no annual or lifetime dollar limits for this credit, except in the case of fuel cell installations, where limits apply based on system capacity.
Requirements for credit
Eligible property installations include:
- Solar electric panels: Must meet specific standards, often certified by state-endorsed entities.
- Solar water heaters: Certified by the Solar Rating Certification Corporation.
- Geothermal heat pumps: Must carry the ENERGY STAR rating.
- Battery storage technology: Must have a minimum capacity of 3 kilowatt-hours.
- Fuel cells: Credit is capped at $500 for each half kilowatt of capacity, with a combined limit of $1,667 per half kilowatt if multiple residents claim the credit for a single home.
Labor costs linked to the installation and wiring needed to connect the system to the home are also eligible expenses. However, traditional roofing materials are generally excluded, although solar roofing tiles or shingles that produce electricity are covered. Financial incentives or rebates from utility companies reduce the overall qualifying expense.
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Who qualifies?
Any US-based homeowner or resident who installs qualified renewable energy systems at a residence they occupy can claim the credit. This includes primary residences and, in some cases, secondary homes used part-time but not rented out. Landlords and those not residing on the property, however, are ineligible. Furthermore, for properties used partly for business, the credit is prorated based on the percentage of personal use.
Steps to claim the credit
To claim the credit, homeowners must complete IRS Form 5695, the “Residential Energy Credits” form, with their tax filing. Only installations completed and in service within the tax year are eligible, so purchases alone do not qualify if the property isn’t installed and operational. For instance, an installation completed in January 2024 should be claimed on the 2024 tax return.
In cases where the tax credit exceeds the homeowner’s total tax liability, the unused portion can carry forward to future tax years, allowing more flexibility for larger projects where immediate full credit usage may not be possible.
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Additional considerations
Several states offer further incentives for clean energy investments. For those taking advantage of state-level incentives or rebates, it’s essential to confirm whether these affect the federal credit. Some state incentives must be deducted from the eligible amount, while others can be added to gross income instead of reducing credit-eligible expenses.
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