How To Take Advantage Of Energy Tax Credits For Home Improvements

By Angela Stringfellow. May 7th 2016

Many homeowners have worked hard to make energy efficient improvements to their homes. Fortunately for them, there are several key tax credits which are available to help offset the cost and promote the use of “green” products.

The American Recovery and Reinvestment Act established two categories for home energy tax relief: the Nonbusiness Energy Property Credit and the Residential Energy Efficient Property Credit.

Nonbusiness Energy Property Credit

The Nonbusiness Energy Property Credit is aimed at several smaller energy efficient home improvements, most of which do not require a significant change to the infrastructure of the home.

According to ENERGY STAR, the joint program between the Environmental Protection Agency and the U.S. Department of Energy which helps consumer make energy efficient choices, eligible improvements qualify for a tax credit equal to 10 percent of the purchase cost up to $500. Some items have a set credit amount ranging from $50 to $300.

The following is a list of eligible improvements under the Nonbusiness Energy Property Credit.

Biomass Stoves

Biomass stoves burn fuel made from agricultural crops and trees, wood and wood waste, plants, grasses, residues and fiber. They are used primarily to help heat a home or for water heating. They must carry a thermal efficiency rating of at least 75 percent to qualify for a $300 tax credit.

Heating, Venting and Air Conditioning (HVAC)

Advanced Main Air Circulating Fans: These fans blow hot air from your furnace through a duct system spread throughout your house. This improves your heating efficiency. The fans can use no more than two percent of the furnace’s total energy and are eligible for a $50 tax credit.

Air Source Heat Pumps: These pumps are an alternative to furnaces and air conditioners in moderate climates. The pumps move heat rather than generate heat. They can provide up to four times the amount of energy it costs to run them. These pumps are eligible for a $300 tax credit.

Central Air Conditioning (CAC): Some central air units are eligible for a $300 tax credit. When purchasing a unit, be sure to search the manufacturer’s website or ask the HVAC contractor if the equipment you are installing qualifies.

Gas, Propane Or Oil Hot Water Boilers: These heating units use water circulated throughout a system of baseboard heating units, radiators or in-floor radiant heating tubes. Eligible units qualify for a tax credit of $150.

Natural Gas, Propane or Oil Furnace: These furnaces use fuel and air to create heat. Eligible units qualify for a tax credit of $150.


Several types of insulation qualify for a tax credit equal to 10 percent of the purchase cost, up to $500. Both bulk insulations as well as some products that reduce air leaks qualify. Be sure to check for a Manufacturers’ Certification Statement on items such as weather stripping, spray foam in a can and caulk designed to tighten seals and house wraps. It’s important to note, however, that the credit to does not extend to installation costs.

Roofs (Metal and Asphalt)

The use of certain metal and asphalt roofing products help reflect more of the sun’s rays. This can lower the roof’s surface temperature by up to 100 degrees which decreases the amount of heat transferred into your home.  The materials must meet ENERGY STAR requirements and are eligible for a tax credit equal to 10 percent of the cost, up to $500.

Water Heaters

Qualified gas, oil and propane water heaters, and electric heat pump water heaters are eligible for a $300 tax credit.

Windows, Doors and Skylights

Installing energy efficient windows, doors and skylights can reduce your energy bills and allow you to qualify for a tax credit. The products must be ENERGY STAR rated. It’s important to note that you do not need to replace all the windows or doors in your home to qualify. Eligible products qualify for a tax credit of 10 percent of the cost, up to $500. Windows are capped at $200.

Residential Energy Efficient Property Credit

The Residential Energy Efficient Property Credit offers tax credits on large scale, significant and more expensive energy modifications to your home. The following improvements can earn a homeowner a tax credit of 30 percent of the purchase price with no cap. These improvements can be made on new or existing structures in principal or secondary homes. Rental units do not qualify.

Geothermal Heat Pumps

Among the most efficient and comfortable heating and cooling technologies available, geothermal heat pumps use the earth’s natural heat from the ground instead of the outside air to generate heat. These pumps can be used for heating, air conditioning and to heat water.

Small Wind Turbines (Residential)

Also known as wind mills, these small turbines collect energy from the wind and convert it into electricity that can be used within a home. The tax credit for small wind turbines also includes installation costs.

Solar Energy Systems

Solar Water Heaters: These water heaters utilize the sun’s thermal energy to heat water. In order to qualify for the tax credit, the system must produce at least half of its energy from the sun. The unit must also be used to heat water for the residence, not a swimming pool or hot tub.

Solar Panels (Photovoltaic Systems): These panels, usually installed on a roof, capture light energy from the sun and convert it directly into electricity. To qualify for the tax credit, the system must provide electricity for the home and meet all applicable fire and electrical codes.

Fuel Cells: These qualify for a tax credit of 30 percent of the purchase cost up to $500 per .5kW of power capacity. This alternative power source utilizes hydrogen and offers a cleaner, more-efficient alternative to gas and oil. The tax credit is only available for principal residences, and does include installation costs.

The biggest question surrounding many of these tax breaks is whether or not the initial investment, which can be costly, pays off in the long run. There is the obvious advantage of energy conservation, but do these improvements lower your bills and how long does it take to recoup the investment cost?

The answer is multifaceted and depends primarily on the modifications made. A homeowner would need to research the estimated per year saving due to the improvements coupled with the tax credits to know if it’s worth the investment. Some modifications with lower upfront costs will payoff quicker; more substantial and costly upgrades may take years to recoup your initial investment.

In the long run, the benefits of these upgrades are more than just financial. The conservation of natural resources and energy will reduce the carbon footprint left on the earth, making it a better place to live for the generations to come.


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