You’ve likely heard about the Inflation Reduction Act, signed into law in August 2022. Ironically, the law does very little to directly reduce inflation.
What it does provide, however, is a wide range of clean energy incentives — including tax credits and rebates for homeowners. Below we’ll walk through the credits you may be eligible for in 2023 and point out a few projects you might want to postpone to future tax years. That way you can plan renovations strategically to maximize available credits and rebates.
What Is the Energy Efficient Home Improvement Credit?
Beginning in 2023, the former Nonbusiness Energy Property Credit has been revamped. From the 2023 tax year onward it’s called the Energy Efficient Home Improvement Credit, and there are no lifetime caps on the benefit.
Instead, the program imposes an annual ceiling of $1,200. Prior to the update, the credit only returned 10% of eligible spending, but starting in 2023 the credit covers 30% of qualifying expenses.
Because of the yearly cap, the most efficient way to time projects would be in approximately $4,000 segments. That’s not always practical for major renovations, but if you can structure work in $4,000 increments, you could claim the full $1,200 each year without overspending.
Tax Credits Don’t Make Renovations Free
These tax credits are unlikely to entirely erase the cost of home upgrades — even for very energy-efficient improvements.
“A common misconception is that a tax credit means you get every dollar back. But credits often have limits, and each qualifying item comes with its own rules,” says Camari Ellis, EA of Philly Tax Team. “Some caps apply and different components carry distinct criteria.”
For instance, Ellis is considering replacing his central air system. He received a $7,000 estimate, but under the Inflation Reduction Act the most he could claim for that AC would be $600.
Still, the credit is only part of the financial benefit of energy upgrades. Ellis notes several clients who took advantage of solar installations and now enjoy noticeably lower monthly energy bills.
“Over time it tends to pay for itself,” he adds.
Because savings are usually gradual rather than immediate, Ellis advises homeowners to pursue credits for projects they were already planning and can afford without stretching finances too thin.
What Qualifies Under the Energy Efficient Home Improvement Credit?
Windows and Skylights
You can use the Energy Efficient Home Improvement Credit to claim whichever is less: $600 or 30% of your actual costs for installing energy-efficient windows and skylights. The windows must meet Energy Star’s “Most Efficient” designation to qualify.
Exterior Doors
Installing Energy Star exterior doors makes you eligible for the lesser of 30% of your documented costs or $250 per door. The overall cap for this portion is the lesser of 30% of real expenses or $500 per year.
Insulation
Insulating your home carries no item-level dollar limit. You can claim up to 30% of actual insulation costs regardless of size — though you remain bound by the $1,200 annual limit across all Energy Efficient Home Improvement Credits.
Insulation must meet the International Energy Conservation Code requirements from two years prior. So for 2023 work, ensure your insulation satisfies or exceeds 2021 standards.
Central Air Conditioning
This credit allows you to claim the lesser of 30% of actual costs or $600 per central AC unit. To qualify, the air conditioner must meet the tier just below “Advanced Tier” in the Consortium for Energy Efficiency (CEE) rating system.
Find the 2023 specification details here.
Natural Gas, Propane and Oil Water Heaters
You may claim the lesser of 30% of your real costs or $600 per water heater. Qualifying units must meet the CEE standard one tier below “Advanced Tier” as described here.
Natural Gas, Propane, and Oil Furnaces or Hot Water Boilers
For each qualifying natural gas, propane, or oil furnace or hot water boiler, you can claim the lesser of 30% of actual costs or $600. Current rules require these units to meet 2021 Energy Star benchmarks. See the standards for furnaces and boilers.
Additionally, the manufacturer must indicate the unit is compatible with up to 20% biofuel.
Elevated Standards Take Effect in 2027
Beginning in 2027, eligibility requirements for furnaces and boilers will be stricter. At that time manufacturers must rate the equipment for use with up to 50% biofuel, and units will need an Annualized Fuel Utilization Efficiency (AFUE) of at least 90.
Electric Panels
Whether installing a main panelboard, subpanel, branch circuit or feeders, you can claim the lesser of 30% of actual costs or $600 per property.
This one has more strings attached: the panel must support a minimum load of 200 amps and be used to supply one of the aforementioned AC units, water heaters, or furnaces/boilers.
Home Energy Audits
The IRS and Treasury are still ironing out details for audits, so it may be prudent to wait for clearer guidance before paying for an audit. Once finalized, you’ll be able to claim the lesser of 30% of the audit cost or $150.
Other Heating Solutions Eligible for Additional Credit
Beyond the $1,200 annual cap, you may qualify for up to an additional $2,000 (or 30% of real costs, whichever is less) for the following items:
- Heat pumps. Must meet at least the tier below “Advanced Tier” per CEE standards.
- Heat pump water heaters. Must meet at least the tier below “Advanced Tier” per CEE standards.
- Biomass stoves or hot water boilers. Must have a thermal efficiency rating of at least 75%.
Additional Things to Know About the Energy Efficient Home Improvement Credit
These Credits Aren’t Refundable and Can’t Be Carried Forward
Energy Efficient Home Improvement Credits can reduce your tax liability down to zero, but they are not refundable.
If the credit exceeds what you owe in a given year, you cannot carry the unused portion into the next year. Note that another credit included in the Inflation Reduction Act — the Residential Clean Energy Property Credit — does allow carryforwards.
You Might Qualify for the Residential Clean Energy Property Credit
The Inflation Reduction Act restored the Residential Clean Energy Property Credit to its 2020 level. After a period of phase-out, the credit has been reinstated at 30% of actual costs with no dollar maximum.
Eligible installations include:
- Residential solar power systems.
- Residential solar water heaters.
- Small wind energy systems.
- Geothermal heat pumps.
- Battery storage systems with at least 3 kilowatt-hours of capacity.
- Fuel cells.
This credit is also nonrefundable, but unlike the Energy Efficient Home Improvement Credit it can be carried over year to year, so any excess can be applied to subsequent tax liabilities.
Phase-Down Timeline
Absent new legislation, this credit remains at 30% for qualifying installations through the end of 2032. It will decrease to 26% for the 2033 tax year and fall to 22% for 2034.
No Sign of Your Project? Check State HOME Rebate Programs
The Inflation Reduction Act also sent substantial funding to states. For states that accept the allocations, the funds will be used to provide consumers with “rebates” when purchasing certain appliances or completing particular energy-efficient home upgrades.
At the federal level these initiatives are called HOME Rebates (for renovations) and the High-Efficiency Electric Home Rebate Program (for appliances), though your state might label them differently.
Program funds were expected to be distributed by this spring, but it could take longer for participating states to activate their programs. Check your state energy office for updates on local rollout and eligibility.
Frequently Asked Questions (FAQ)
States may set lower limits, but the federal maximum rebates for single-family home retrofits are generally tiered as follows:
- Retrofits reducing energy use by 15%–19%: Rebate prorated per kilowatt-hour saved, up to the lesser of $2,000 or 50% of actual costs.
- Retrofits reducing energy use by 20%–35%: The lesser of $2,000 or 50% of actual costs.
- Retrofits reducing energy use by 35%+: The lesser of $4,000 or 50% of actual costs.
States can impose stricter rules when creating their programs, but federally there’s an income-based structure: households earning up to 150% of area median income (AMI) may qualify. If you earn under 80% of AMI, you could receive up to 100% of the purchase price covered; if you earn between 80% and 150% of AMI, you may be eligible for 50% coverage.
The federal maximum rebate per item, regardless of income, is anticipated to be:
- Heat pump water heaters: $1,750
- Heat pump space heating/cooling: $8,000
- Electric stoves or electric heat-pump clothes dryers: $840
- Electric panel or breaker box upgrades: $4,000
- Insulation, air sealing, or ventilation: $1,600
- Electric wiring: $2,500
The expectation is that for these items the rebate will be applied as a point-of-sale discount; you’ll likely need to bring income verification when making your purchase.
The total maximum federal rebate across all listed items is capped at $14,000.
Can you stack HOME rebates with federal tax credits? The honest answer: it’s unclear yet. Once state programs launch, Treasury guidance should clarify rules around combining incentives.
Given current ambiguity, if your project might qualify for both HOME rebates and federal tax credits, you may want to pause until the Treasury Department issues firmer guidance.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to Savinly.
