For homeowners looking to make energy upgrades to their homes, the 25C Tax Credit is one of the most worthwhile incentives out there. It gives people shopping for energy-efficient home upgrades sizable financial savings by reducing their tax bill.
25C is a non-refundable credit recently updated under the Inflation Reduction Act. It encourages energy efficiency by lowering a homeowner’s tax burden if they install qualifying upgrades such as adding insulation, sealing doors and windows, making electrical improvements, and more.
The credit was previously capped at $500 but starting in 2023, the credit increases to 30% of total installation costs through 2032. So, 25C will give up to 30% back and your annual tax credits could total $3200, depending on your upgrades.
The credit is for heat pumps, heat pump water heaters, biomass stoves/boilers, building envelope components (windows, doors, insulation, and air sealing), energy audits, and qualifying electrical upgrades.
25C is not an unlimited credit and is capped at $2,000 annually for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers.
And there’s a $1,200 yearly tax credit cap for all building envelope components, home energy audits, and energy property.
So, if a homeowner installs a heat pump and makes energy-efficient building envelope upgrades, they could get up to a $3,200 credit.
There is a lifetime cap of $600 per measure (exceptions listed below).
Building Envelope Upgrades. This includes weatherization improvements (like insulation materials (rolls, spray foam, etc.), air sealing supplies or systems, and ENERGY STAR-certified windows and doors.
- ENERGY STAR-certified exterior doors (30% of costs up to $250 per door, up to a total of $500).
- ENERGY STAR-certified exterior windows and skylights (30% of costs up to $600)
- Insulation materials or systems and air sealing materials or systems (30% of costs)
Home energy audits (30% of costs up to $150)
Energy-efficient upgrades (30% of costs, including labor, up to $600 for each item) satisfying the energy efficiency requirements (See Q1 below):
- Central air conditioners.
- Natural gas, propane, or oil water heaters.
- Natural gas, propane, or oil furnaces and hot water boilers.
- Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property and enable its installation and use.
Heat pumps and biomass stoves and biomass boilers (30% of costs, including labor) satisfying the energy efficiency requirements (See Q1 below):
• Electric or natural gas heat pump water heaters.
• Electric or natural gas heat pumps.
• Biomass stoves and biomass boilers.
Q1: What are the energy efficiency requirements for 25C?
The following energy efficiency requirements must be met to qualify for the Energy Efficient Home Improvement Credit (Courtesy of the IRS. And you can learn more by reading the IRS Fact Sheet):
- Exterior doors: must meet applicable ENERGY STAR requirements.
- Windows and skylights: must meet ENERGY STAR’s most efficient certification requirements.
- Insulation materials or systems and air sealing materials or systems: must meet the criteria established by the International Energy Conservation Code (IECC) standard in effect at the start of the year that is two years prior to the year the materials or systems are placed in service. For example, materials or systems placed in service in 2025 must meet the criteria established by the IECC standard in effect on January 1, 2023, to qualify for the Energy Efficient Home Improvement Credit in 2025.
- Electric or natural gas heat pumps, electric or natural gas heat pump water heaters, central air conditioners, natural gas or propane or oil water heaters, natural gas or propane or oil furnaces or hot water boilers: must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency (CEE) that is in effect as of the beginning of the year in which the property is placed in service. See also the CEE Directory of Efficient Equipment for a searchable database of qualifying equipment.
- Oil furnaces or hot water boilers can alternately qualify if they (1) meet or exceed 2021 ENERGY STAR efficiency criteria and are rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel; or (2) if placed in service after December 31, 2026, achieves an annual fuel efficiency rate of not less than 90 and is rated by the manufacturer for use with fuel blends at least 50 percent of which consists of an eligible fuel.
- Biomass stove or biomass boilers: must have a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel).
- Panelboards, sub-panelboards, branch circuits, or feeders: must be installed according to the National Electric Code and have a load capacity of 200 amps or greater.
Q2: Can a taxpayer claim 25C tax credits for updates on a newly constructed home?
Under the Energy Efficient Home Improvement Credit: a taxpayer can claim the credit only for qualifying
expenditures incurred for an existing home or for an addition to or renovation of an existing home, and not for a newly constructed home.
Q3: Labor Costs: Can a taxpayer homeowner include labor costs when calculating the credits?
When calculating the Energy Efficient Home Improvement Credit, a taxpayer mayThey can include the labor costs for the onsite preparation, assembly, or original installation of residential energy improvements such as central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; or improvements to panelboards, sub-panelboards, branch circuits, or feeders.
In contrast, a taxpayer may not include the labor costs for qualified energy-efficient building envelope components including a qualifying insulation material or system, exterior window, skylight, or exterior door. Thus, for an energy-efficient building envelope component for which a taxpayer pays a fixed price, the taxpayer must make a reasonable allocation between the qualifying cost of the property and the nonqualifying labor cost of the installation.
Q4: How many times can I use the credit?
25C resets every year, so if you claim a heat pump installation and insulation this year, you can use it again in the future when you upgrade your electrical panel.
Q5: How long is 25C available?
The credit is available until 2032 when it is expected to go down.
Are you ready to take advantage of the 25C Tax Credit?
The Green Insight team will guide you through the process and ensure you meet all the energy efficiency requirements so you can claim your credits.
Contact us today to discuss how we can help you claim your credits and have a more energy-efficient home.
Learn about the 179D Tax Deduction and 45L Tax Credit, also part of the Inflation Reduction Act.