The Inflation Reduction Act of 2022 expanded and extended some major energy tax credits, giving taxpayers more opportunities to save money on energy-efficient improvements to their homes and the purchase of eligible clean vehicles. The One Big Beautiful Bill (OBBB) includes several changes to the tax code, including the end of these energy tax credits. The Clean Energy Vehicle Tax Credit will expire for vehicles purchased after September 30, 2025. The Energy Efficient Home Improvement tax credit will expire on December 31, 2025. Here’s what you should know to help your clients take advantage of the 2025 energy tax credits before they expire.
What energy tax credits are available?
Energy tax credits available to most taxpayers include home energy credits and clean vehicle credits, which help reduce costs for qualifying home improvements and the purchase of electric or fuel cell vehicles. The IRS categorizes these credits as Clean Energy and Vehicle credits.
Several of these credits are available only to specific types of businesses, such as builders of energy-efficient homes or commercial buildings. For most taxpayers, however, the most relevant energy tax credits will be the home energy and clean vehicle credits.
The home energy credits include the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit, which apply to certain home updates and improvements. The clean vehicle credits are designed to help offset the cost of purchasing certain qualified electric vehicles (EVs) or fuel cell vehicles (FCVs).
Who qualifies to claim energy tax credits for their home and vehicle?
Home and energy tax credits generally qualify for homeowners who make eligible improvements to their primary residence, and in some cases, renters or owners of a second home may also claim them. The credits do not apply to improvements made to a home not used as a residence by the owner, such as a rental property. The home energy credits are typically available for the year the homeowner makes the qualifying improvements.
The Inflation Reduction Act of 2022 significantly updated the clean vehicle credits. They are available for individuals and businesses who have purchased a qualifying EV or FCV. Individual taxpayers may qualify for the credit for both new and used vehicles, while vehicles purchased for business use must be new. Under the Inflation Reduction Act, these tax incentives weren’t set to expire until 2032. However, with the signing of the OBBB, this credit will expire in 2025. Advise clients that this credit will only be available for vehicles purchased prior to September 30, 2025.
How do residential energy credits work and how to claim them?
Residential energy credits, often called energy efficiency credits, provide homeowners with tax incentives for making qualified improvements that enhance energy efficiency in their residences.
The credits are typically calculated based on a percentage of the costs incurred for specific energy-efficient upgrades, including installations such as solar panels, energy-efficient heating and cooling systems, insulation, and windows. For example, homeowners may qualify for a credit of up to 30% of the cost of solar panel installations. The credit percentage will vary depending on the specific type of upgrade.
Once a homeowner has made qualifying improvements, your client can claim these credits on Form 5695, which calculates the Residential Energy Efficient Property Credit. Generally, your client can only claim this credit in the year the improvements were installed (not purchased). However, if excess credit is unused, it can be carried forward. Clients will only be able to carry forward unused portion of the credit for qualifying equipment installed prior to the December 31, 2025 expiration.
The Energy-Efficient Home Improvement Credit
The Energy-Efficient Home Improvement Tax Credit, as outlined by the IRS and Energy.gov, allows eligible homeowners to receive tax incentives for making energy-efficient improvements to their residences through 2025. This credit aims to promote energy conservation and reduce environmental impact by encouraging the installation of energy-efficient components in residential properties. The following are some of the eligible improvements included in the credit:
Heating & Cooling Tax Credits
- Energy-efficient central air conditioners and heaters (annual limit of $600), furnaces, boilers, and heat pumps
- Biomass stoves and boilers
Water Heating Tax Credits
- Energy-efficient water heaters (annual limit of $600), gas or oil boilers, biomass boilers
Building Products Tax Credits
- Exterior doors (annual limit of $250 per door and $500 total), windows and skylights (annual limit of $600), and insulation materials
For specific information on qualifying products, refer to the requirements detailed on energy.gov or IRS Fact Sheet FS-2022-40.
Electric Panel Upgrade Tax Credits
- Improvements of or purchase of new, qualifying panelboard, sub-panelboard, branch circuits, or feeders (maximum annual limit of $600 for any such improvements)
How to calculate energy efficient home improvement credit
To determine the Energy Efficient Home Improvement Credit, homeowners calculate a percentage of eligible improvement costs incurred during the year the upgrades are installed, subject to annual limits set by the IRS. The rules differ depending on the type of improvement and the tax year.
Before 2022, the credit was capped at a maximum of $500 over the lifetime of the taxpayer. Starting in 2023, however, the Inflation Reduction Act dramatically increased the credit. The following limits are still relevant for tax year 2025:
- For years 2023 through 2025: A credit of 30% of the total improvement expenses, up to a maximum of $1,200. Certain improvements also have separate annual limits, as listed above. These limits count towards the total limit of $1,200.
- For heat pumps, heat pump water heaters, biomass stoves, and boilers, there’s a separate annual credit limit of $2,000 that does not count toward the annual $1,200 limit. This means your clients could claim up to $3,200 per year.
- These improvements have no lifetime limit, so your clients could spread out improvements over several years to maximize their credit amounts.
- This credit is not refundable, so while it can reduce total tax liability to $0, any remaining credit will not be added to a refund amount.
Residential Clean Energy Credit
The Residential Clean Energy Credit works similarly to the Energy Efficient Home Improvement Credit, allowing homeowners to claim a credit of up to 30% of the cost of the following improvements to their home:
- Solar, wind, and geothermal power generation
- Solar water heaters
- Fuel cells
- Battery storage
This residential tax credit has no annual maximum or lifetime limit, so homeowners can claim the full 30% of the total cost of the improvement for 2023 through December 31, 2025. The Clean Vehicle Tax Credits
You are most likely to see the two types of clean vehicle credits in the upcoming tax season: new clean vehicles purchased in 2023 for individuals and their businesses and used clean vehicles for individual use. You can review these IRS articles pages for information on claiming credits on 2022 tax returns or for claiming commercial clean vehicle credits.
Clean Vehicle Credit
The Clean Vehicle Credit can offer meaningful savings, but the rules vary depending on the type of vehicle and when it was placed in service. The following information includes eligibility criteria, seller requirements, and calculating the credit for both new and used clean vehicles.
New clean vehicles for personal use purchased 2023 or later
For new clean vehicles purchased in 2023 or later, your clients may qualify for a credit of up to $7,500. To qualify, the vehicle must meet the following qualifications:
- Vehicle use: Must be for personal use or the individual’s business (i.e., sole proprietorships and other business entities)
- Modified Adjusted Gross Income (MAGI): Must be equal to or less than these thresholds
- $300,000 for married filing jointly
- $225,000 for head of households
- $150,000 for all other filers
The credit is calculated differently depending on when the vehicle was placed in service.If the vehicle was placed in service between January 1, 2023, and April 17, 2023:
- Start with a $2,500 base amount
- Add $417 for a vehicle with at least 7 kilowatt hours of battery capacity
- Add an additional $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours (up to the limit of $7,500)
Vehicles put in service on or after April 18, 2023, must also meet additional critical mineral and battery component requirements, which will determine how you calculate the credit.
- Vehicles that meet only either the critical mineral or batter component requirements will qualify for a credit of $3,750
- Vehicles that meet both qualify for the full $7,500
For 2024 and 2025, 60% of the battery component must come from North America.
It’s important to know that your client only qualifies for the credit if the seller of the car has registered with the IRS to enable credits. They must also provide the buyer with information about the vehicle qualifications at the time of sale and must provide a report to the IRS with the vehicle’s information and the taxpayer’s name and TIN.
As of 2024, this credit can be advanced at the point of sale and paid directly to the seller. However, it will need to be reconciled on the tax return as anon-refundable credit. Any excess advanced credit will need to be repaid. If the vehicle is leased, the credit will transfer to the dealer without having to be repaid.
Before attempting to claim this credit for your client, be sure to get a copy of this report and verify that the seller has submitted your client’s information to the IRS. To help your client claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit with their tax return.
Used Clean Vehicle Credit
The Used Clean Vehicle Credit is available to individuals who have purchased a qualifying used clean vehicle that cost $25,000 or less and is at least two model years older than the year in which they bought it (i.e. for tax year 2023, the vehicle must be a model 2021 or earlier). Additionally, the taxpayer cannot have claimed a clean vehicle credit within the previous three years and their modified AGI must be under the following thresholds: $150,000 for married filing jointly or a surviving spouse, $112,500 for head of households, $75,000 for all other filers.
The credit is calculated as 30% of the vehicle sale price, up to a maximum of $4,000. Just as you would for a new clean vehicle, you’ll use Form 8936 to claim the credit.
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