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Green Energy Tax Credits for Home Improvement & Energy Efficiency

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For homeowners and bill-paying renters, the cheapest way to save money on utilities is to reduce consumption. In summer, raising the temperature setting on your air conditioner or using a high-speed floor fan on all but the hottest days can drastically cut air conditioning costs. In winter, you can really trim your gas or oil bill by wrapping your windows, lowering your thermostat a few degrees, and settling into your favorite sweater.

Such fixes are fast, easy, and effective. But they don’t permanently reduce your fossil fuel-burning appliances’ carbon footprints or improve your home’s ability to retain warm or cool air. To make a lasting, meaningful difference in your home’s energy profile, more involved – and often expensive – home improvements and upgrades are required.

The good news is that federal, state, and local governments want your home to be more efficient and Earth-friendly. Surprisingly, so do many utility companies which, after all, earn money whenever your furnace or air conditioner kicks in.

Federal, state, and local tax credits and other financial incentives partially offset the cost of a slew of residential green energy projects, helping more homeowners finance them out of their savings or afford the principal and interest payments on FHA 203k renovation loans. Here’s a look at the present lineup of federal tax credits and incentives, plus a representative slice of the hundreds of state and local credits and incentives available today.

Federal Green Energy & Home Efficiency Tax Credits/Incentives

Most of these green energy tax credits and incentives are valid through the end of 2021. The exception is the EEM program, which is available indefinitely. They are offered by the Federal Government and are available to any U.S. homeowner who files a federal tax return. Unless otherwise noted, you can apply for each credit by filing IRS Form 5695 with your federal tax return.

Solar Energy Generation

Solar water heaters and photovoltaic solar electricity generation systems (solar panels) use the carbon-free power of the sun to heat water or generate electricity. They both qualify for a tax credit equal to 26% of the equipment and installation costs through 2020, with no cap on credit size. In 2021, the credit further decreases to 22%, and expires completely for residential customers on December 31st of that year. (Commercial customers can claim a 10% credit on qualifying solar generation installations after 2021.)

This credit can be claimed on existing and new construction homes (including second homes), but not on rental properties.

  • Solar Water Heaters: To qualify for the credit, solar water heaters must generate at least half their energy from solar and must be certified by the Solar Rating and Certification Corporation (SRCC). However, all ENERGY STAR-rated solar water heaters qualify. Heated water must be used in the dwelling itself – swimming pool and hot tub heaters don’t count. According to Angie’s List, the typical solar water heater costs $2,000 to $5,500 with installation, though pricier models can cost more.
  • Solar Panel Systems: Qualifying solar panels must generate electricity for the residence itself. They must meet all applicable fire and electrical safety code requirements, which can vary from place to place. According to Solar Power Authority, equipment and installation costs add up to approximately $7 to $9 per watt, or $25,000 to $35,000 for a five-kilowatt system capable of powering the average American home (without accounting for rebates). However, solar panel prices have fallen considerably in recent years, and many utilities offer incentives that reduce out-of-pocket costs.

Wind Energy Generation

Residential small wind turbines use the power of the wind to generate carbon-free electricity. Though they’re compact compared to utility-scale turbines, which soar hundreds of feet into the air and sweep an area of an acre or more, they do require ample space, so they’re not ideal in densely populated urban areas.

According to EnergySage, equipment and installation costs for a turbine sufficient to power an average home (roughly five kilowatts of generating capacity) vary dramatically: from $15,000 to $75,000 before rebates, depending on system capacity. Needless to say, more expensive systems take longer to pay for themselves, though many installers offer financing options that reduce upfront costs.

According to the U.S. Department of Energy, small wind turbines qualify for a tax credit equal to 26% of equipment and installation costs, with no upper limit on credit size, through 2020. The credit steps down to 22% in 2021 and expires completely at the end of that year.

Qualifying turbines’ “nameplate” generating capacity (maximum capacity under ideal wind conditions) must be no more than 100 kilowatts. The credit can be claimed on new and existing primary residences and second homes, but not on rentals.

Geothermal Heat Pumps

Geothermal heat pumps draw upon the planet’s vast reserves of internal heat to generate low-carbon heat and electricity. Depending on the system, they provide hot water, air conditioning, and home heating. According to the Department of Energy, geothermal heat pumps use 25% to 50% less electricity than traditional heating and cooling systems. However, they’re pricey: According to EnergyHomes.org, it can cost $20,000 to $25,000 to install a geothermal system in a 2,500-square-foot home, with a payback period of up to 10 years.

Geothermal heat pumps qualify for a tax credit equal to 26% of equipment and installation costs, with no upper limit, through 2020. The credit drops to 22% in 2021 and expires completely at the end of that year.

Qualifying geothermal systems must meet the minimum efficiency and performance benchmarks outlined by the Department of Energy. They can generate some or all of the water heat, house heat, and air conditioning for the property. The credit applies to systems installed in new and existing primary homes and second homes, but not rental properties.

Geothermal Heat Pumps

Fuel Cell Energy Generation

Residential fuel cell and microturbine systems are compact units that simultaneously generate home heat, water heat, and electricity from a single location within the home. They typically run on natural gas or biofuels (liquid fuel made from organic materials), and can operate independently of the local power grid (meaning they continue to function during blackouts). They’re quite costly – per FuelCellsWorks, total system costs can approach $100,000 in existing homes. New construction installations are usually less expensive because no retrofitting is needed.

Fortunately, these systems qualify for a federal tax credit equal to that for wind, solar, and geothermal. Homeowners can claim credits equal to 26% of equipment and installation costs through 2020, then 22% through 2021. The credit expires on December 31, 2021.

Qualifying systems must have efficiency ratings of 30% or better and generating capacities of at least 0.5 kilowatt. The credit applies to systems installed in new and existing primary homes only. Second homes and rental properties are not eligible.

Energy Efficient Mortgage Program

The FHA’s long-running Energy Efficient Mortgage program (EEM) bundles the cost of energy-efficient home improvements into a new purchase, refinance, or 203k rehabilitation loan and insures the entire amount. The portion of the loan earmarked for the improvements does not factor into the lender’s underwriting calculations.

For example, a borrower who would normally qualify for a loan no larger than $150,000 could get a $155,000 EEM if $5,000 of the loan’s principal went to cover approved energy-efficient improvements. Under FHA guidelines, borrowers can put as little as 3.5% of the purchase price down, though they’re required to pay mortgage insurance premiums until they reach 80% loan-to-value.

Before applying for an EEM, homeowners and buyers must get a home energy assessment from a qualified professional certified by Building Performance Institute or Residential Energy Services Network. They must then use the results of the assessment to identify realistic opportunities for efficient upgrades and improvements.

The EEM program is designed to reward homeowners for “cost-effective” projects only. FHA defines cost-effective upgrades and improvements to existing homes as those projected to pay for themselves over the upgrades’ expected lifespans, relative to the homeowners’ expected status quo energy costs during that period. In new construction homes, FHA defines cost-effective upgrades as exceeding the most recent HUD-adopted standards set by the International Energy Conservation Code.

The EEM program’s financing capacity is not unlimited. No matter how many cost-effective projects their assessors identify, nor those projects’ cumulative dollar value, homeowners can use EEMs to finance only the lesser of:

  • The total value of the cost-effective improvements identified by the home energy assessment
  • The lesser of 5% of: the home’s adjusted value, 115% of the median local price of a single-family dwelling, or 150% of the national conforming mortgage limit

EEMs have been available to borrowers across the United States since 1995 and are expected to remain available indefinitely.

Expired Credits for Energy-Efficient Home Improvements

In 2017, the U.S. Congress declined to reauthorize a raft of federal tax credit programs for energy-efficient home improvements set to expire at the end of that year. The most popular of those programs promised federal income tax credits up to $300 to owner-occupants for qualifying installations of:

Air Source Heat Pumps

Air source heat pumps efficiently distribute heat throughout the home, providing warm and cool air (in a single system) at anywhere from one-and-a-half to three times the efficiency of conventional heating and cooling systems. Though newer models are capable of operating through extended sub-freezing periods, heat pump efficiency inexorably declines with the outdoor temperature, and the systems aren’t appropriate for year-round use in places with very cold winters, such as Alaska, Canada, higher elevations of the Mountain West, and the interior of the northern United States.

Still, in milder climates (lower elevations on the West Coast, the southeastern United States, the coastal Northeast and Mid-Atlantic regions), heat pumps can entirely replace traditional furnaces and air conditioners. In colder climates, heat pumps are typically paired with oil or gas furnaces to provide adequate heat at the beginning and end of the heating season, when outside temperatures are high enough for the systems to work properly. According to the Northeast Energy Efficiency Partnerships, heat pumps save an average of $459 per year when replacing electric resistance heaters and $948 per year when replacing oil-fired systems.

Ductless air source heat pumps capable of heating an entire average-sized home cost anywhere from $2,000 to $7,000 for equipment and installation. Whole-house heat pumps that use existing ducts cost $2,000 to $8,000 for equipment and installation, and heat pumps that require new ductwork can cost upwards of $20,000 with installation.

Biomass Stoves

Also known as wood stoves, biomass stoves provide home heat by burning wood pellets and other types of fuel derived from plant matter – including raw wood, in some cases. Though biomass fuels are by definition renewable, wood stoves must meet the Environmental Protection Agency’s 2020 clean air standards, and local authorities may restrict their operation temporarily on bad air quality days (which are more likely to occur in major urban areas and heavily populated mountain valleys). Homeowners are also strongly advised to follow the EPA’s voluntary Burnwise guidelines for safe, efficient operation.

According to the Department of Energy, a pellet stove capable of heating an average-sized home costs $1,700 to $3,000. Systems that burn other types of biomass fuels tend to cost more.

Install Biomass Stoves

Central Air Conditioning Systems

Efficient central air conditioning systems use grid electricity to generate and spread cool air throughout dwellings. According to This Old House, it costs $3,500 to $4,800 to install central air conditioning in a 2,000 square foot home with existing forced-air heating ductwork, and $7,000 to $10,000 to install central air in homes without existing ductwork.

Non-solar Water Heaters

Non-solar water heaters use natural gas or electricity to heat water used in the home. According to HomeGuide, a 40- to 50-gallon tank water heater costs around $650 on average to install, while a tankless water heater costs about $2,000 to install. Costs vary widely by heater model, the installer’s rate (a licensed plumber will likely charge more), and whether disposal is required for the old heater.

Conventional Fuel Boilers and Furnaces

Efficient boilers and furnaces use fossil fuels, such as natural gas and oil, to provide hot water or air to home heating systems. According to HomeAdvisor, a new boiler installation costs anywhere from about $3,500 to about $7,500, with pricing higher for larger and higher-efficiency models. A new furnace costs approximately $2,500 to $6,500, depending on the model.

Building Envelope Improvements

The “building envelope” is defined as any part of the building that lies between conditioned indoor spaces and the outdoors. Depending on its location and construction, a building’s envelope can include its exterior walls, roof, windows, doors, skylights, and lower-level floors.

Until the end of 2017, the Federal Government offered several tax credits for improvements to various parts of the building envelope. Unless otherwise noted, all applied to existing principal residences only. Second homes, new construction houses, and rental properties did not qualify.

  • Insulation: This credit applies to insulation in any part of the building envelope, including attics, crawlspaces, basements, and exterior walls. Qualifying insulation types include (but are not limited to) batt, blow-in, roll, expanding spray, rigid board, and pour-in-place. Some additional products that reduce heat loss also qualify, including weatherstripping, caulk, house wrap, and canned spray foam for small air leaks. According to Fixr, insulation costs between $1 and $3 per square foot, so, for example, it costs approximately $500 to $1,500 to insulate a 500-square-foot attic floor, depending on the type of material. The average cost of insulating an entire 2,500 square foot house ranges from $3,500 to $4,500, according to Fixr.
  • Roofs: This credit covered ENERGY STAR-rated asphalt or metal roofing materials with cooling granules or pigmented coatings designed to reduce heat absorption. According to HomeAdvisor, it costs approximately $5,500 to $10,500 to professionally install a new asphalt roof on an average-sized home, and $5,100 to $24,200 to professionally install steel or aluminum roofs.
  • Windows and Skylights: This credit applied to ENERGY STAR-rated windows and skylights, a full list of which (along with efficient doors) can be found here. Efficient replacements for existing windows and skylights – as well as new efficient windows and skylights (for instance, in home additions) – qualify. HouseLogic pegs the cost of a new double-paned window at $270 to more than $800, including installation. High-efficiency windows generally come in at the higher end of that range. These costs quickly add up: If you’re looking to replace all the windows in an average-sized home, expect to pay a low-five-figure sum.
  • Doors: This credit covered ENERGY STAR-rated exterior doors, which typically cost between $1,500 and $2,500, according to Angie’s List.

Building Envelope Improvements

Selected State, Local, and Utility Credits/Incentives

Every state government has its own unique lineup of green energy and home efficiency tax credits and incentives. Many smaller jurisdictions, such as city and county governments, offer green breaks. And some of the country’s largest utilities cut their customers financial slack too.

DSIRE, a Department of Energy-funded initiative housed at North Carolina State University’s NC Clean Energy Technology Center, has a comprehensive, up-to-date list of state, local, and utility-run green policies and incentives. Here’s a geographically diverse sampling, courtesy of DSIRE.

  • Solar Water Heaters, Pennsylvania: Owner-occupant customers of select Pennsylvania utilities qualify for state income tax rebates up to $500 per system. Qualifying solar water heaters must be installed by licensed contractors.
  • Renewable Energy Products, Rhode Island: The state of Rhode Island waives its 7% sales tax on items refined by state statute as “renewable energy products.” These include solar photovoltaic panels, solar thermal collectors, geothermal heat pumps, wind turbine towers, and DC-to-AC inverters that allow homeowners to pump energy back into the electric grid. There is no cap to this exemption.
  • Property Tax Exemption for Solar Systems, New Mexico: New Mexico’s long-running Property Tax Exemption for Solar Systems exempts installed residential solar photovoltaic systems from property tax assessments at the time of installation, potentially reducing homeowners’ property tax bills by hundreds of dollars each year (depending on the value of the system, value of the home, and local property tax rates).
  • Pacific Gas & Electric Residential Rebates, California: Pacific Gas & Electric, a major California utility, offers utility bill rebates to customers who purchase efficient appliances and equipment. Rebates are subject to change by year, but perennial examples include up to $300 back on electric heat pump water heaters and $100 back on smart thermostats.
  • Residential Energy Efficiency Loans and Rebates, Tallahassee, Florida: The City of Tallahassee offers a slew of residential energy efficiency loans and rebates (covering about 25 appliances and improvements in all). Loan terms typically range from 5 to 10 years, carry relatively low fixed interest rates, and are secured with a property lien. To qualify, borrowers must be residential electric or natural gas utility customers. Eligible appliances and improvements include efficient natural gas dryers, natural gas ranges, refrigerators, windows, doors, pool pumps, and roofing, as well as solar photovoltaic panels and water heating systems. The maximum loan principal is $10,000. Residential Energy Efficiency Loans Rebates

Final Word

Green energy and energy efficiency technology have improved drastically – and have become significantly more affordable – since the late 20th century. Thanks in part to these tax credits and incentives, the pace of these improvements has accelerated during this decade.

Most new construction homes contain state-of-the-art appliances, building envelope improvements, and mechanical systems. They offer a degree of efficiency and comfort that simply didn’t exist a generation ago. Most importantly for cost-conscious home buyers and homeowners, these systems are less expensive to install, meaning they pay for themselves faster than ever before.

There’s no guarantee that current and future politicians will step up to renew expiring green energy and energy efficiency tax credits, nor pass new ones into law. However, with all the strides we’ve made in recent years, it’s possible that we’ve reached a tipping point at which wind, solar, and efficiency technologies no longer need substantial government support to entice buyers. Whatever your political inclinations, that’s a collective achievement to take pride in.

Have you taken advantage of any green tax credits or incentives recently?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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