As part of the federal government’s push toward sustainability, the Energy Efficient Home Improvement Credit (also known as the Section 25C credit) has helped millions of homeowners reduce their energy bills while receiving valuable tax incentives. However, recent legislative changes mean time is running out to take advantage of this opportunity.
What Is the Energy Efficient Home Improvement Credit?
The Energy Efficient Home Improvement Credit allows homeowners to claim up to $3,200 annually for qualifying energy-efficient upgrades. This non-refundable federal tax credit covers up to 30% of eligible expenses for improvements such as:
- Exterior doors
- Windows and skylights
- Insulation and air conditioning
- Home energy audits
- Heat pumps, water heaters, stoves/boilers
What Is Considered Qualified Property?
To claim the credit, your home must be:
- Under the base limit. There is a $1,200 annual maximum for upgrades such as insulation, exterior doors, exterior windows and skylights, home energy audits, AC, furnaces, boilers, and water heaters that meet specific energy efficiency standards provided by Energy Star and the International Energy Conservation Code
- Tax Credit for exterior doors is capped at $250 per door and $500 total
- Tax Credit for windows and skylights is capped at $600
- Tax Credit for home energy audits is capped at $150
- Heat pumps, heat pump water heaters, and biomass stoves or boilers can receive up to an additional $2,000 annual tax credit if they meet Internal Revenue Service (IRS) and U.S. Department of Energy (DOE) criteria
Examples:
- You install three (3) new windows priced at $700 each. Thirty percent (30%) of the total cost ($2,100 x 0.3 = $630) gives you a limited tax credit of $600
- Installing a qualified heat pump that costs $5,000 = $1,500 in tax savings (30% and within the $2,000 income tax credit limit)
- Your home energy audit costs $400, you get a $120 credit
- The total tax credit for all three (3), if applicable = $2,220
What Are the Guidelines?
- Homeowners must make qualified improvements to claim the income tax credit before December 31, 2025, because of The One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025
- This represents a notable change in the previous extension provided by the Inflation Reduction Act, which extended the income tax credit until 2032
- Must be located in the U.S
- Improvements must be made to already existing homes, not new construction
- Labor for installation is excluded from the qualified cost
- The manufacturer of the newly installed property must be registered and approved by the IRS
- It must be your primary residence (prohibits vacation homes or rental properties)
- Additional limitations apply for homes used for business purposes
- Qualified auditors must complete home energy audits
- Recordkeeping is necessary! You must be able to provide a receipt, invoice, or written and signed inspection report (home energy audits)
What Are the Key Considerations?
This income tax credit is non-refundable, meaning it will lower your tax liability dollar for dollar but will not reduce it below zero. It only applies to home improvements made prior to December 31, 2025.
Remember…
- Improvements must meet certain criteria to qualify for this income tax credit
- The income tax credit is non-refundable
- The income tax credit is no longer available after December 31, 2025
Planning on How to Claim the Energy Efficient Home Improvement Credit
File IRS Form 5695 with your tax return for the year the property was installed. Keep detailed records, including receipts and contractor information. For home energy audits, ensure the auditor is certified by a Department of Energy-approved program.
How Can Our Unique Perspectives Assist You?
With the Energy Efficient Home Improvement Credit set to expire at the end of 2025, now is the time to act. Making upgrades such as enhancing insulation, installing a heat pump, or replacing windows may lower both energy expenses and tax obligations. McConnell Jones encourages homeowners to consult with a qualified tax advisor to ensure compliance and optimize potential savings.