Saving with the energy efficient home improvement credit

Financial advisors whose clients are planning for improvements to their homes could help them plug into major savings by guiding them through a new tax credit for eco-friendly repairs.

Late last month, the IRS and the Treasury Department issued guidance and a request for public comments on the “energy efficient home improvement credit,” which provides up to 30% in savings on the cost of the repairs, up to a maximum of $1,200, as part of the Inflation Reduction Act’s many incentives for lower fuel usage and other green practices. The 2022 legislation boosted the limit to that annual level from a previous ceiling of $500 over the taxpayer’s lifetime. With the yearly credit rising and other available perks for geothermal upgrades such as a solar roof of up to $2,000, advisors could help clients get as much as $3,200 toward the expense of energy efficient repairs, according to Erin Wood, the senior vice president of financial planning and advanced solutions with Omaha-based Carson Group.

“Those are some pretty big tax credits,” Wood said in an interview. “And then if you’re eligible for the state rebates, those can actually go on top of that.”

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In the Dec. 29 release, the IRS and Treasury asked for feedback by Feb. 27 on their proposal to add a requirement for taxpayers claiming the home improvement credit to list a “product identification number” on their returns for certain new types of equipment such as an HVAC systems, doors or windows qualifying for the break. Under the proposal, the mandatory reporting of the PIN number would begin at the start of 2025. 

“What stands out is tax filers will have another item to keep track of when claiming the energy efficient credit, but they would need to have documents that show information regarding their energy efficient purposes at tax time anyway so it should not be too much additional information to track,” Lisa Greene Lewis, a certified public accountant who’s a tax expert with Intuit TurboTax, said in an email.

Currently, many advisors, tax professionals and clients are doing a lot of research on the credit, and the IRS is trying to avoid some of the guesswork among different existing qualifications like Energy Star standards for windows and doors, the International Energy Conservation Code for insulation and the Consortium for Energy Efficiency guidelines for heat pumps, water heaters, AC units, furnaces and boilers, according to Dana Lashbaugh, the managing member for Everett, Washington-based accounting firm the CPA Group.

“This new IRS guidance overall goal is to move some of that research onto the manufacturer, salesperson or installer from the taxpayer,” Lashbaugh said in an email. “With this new requirement, the IRS is creating an overall standard that marries the separate requirements. Unfortunately, these unique PINs will be another item required in preparing a tax return, or otherwise forfeit the credit. It also creates another reporting requirement by the manufacturer, salesperson and installer, which are not always the same company.”

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Advisors, tax professionals and their clients can use resources such as an online “savings calculator” from nonprofit electrification organization Rewiring America to figure out the potential tax benefits for energy efficient home repairs, said Luke Neumann, a wealth planner with Boston-based Crestwood Advisors.

“High net worth clients are frequently renovating or otherwise improving their homes and properties. Advisors can take a moment to direct clients to the various tax incentives for green energy and energy efficiency projects. These tax incentives will reduce the payback period significantly for many types of projects,” Neumann said in an email. “Clients can plug in their demographic information to understand what they might qualify for (some incentives are specifically for low-income families, but some significant incentives are not capped on income).”

The higher annual limit, as compared to the previous lifetime maximum, enables clients to get the full savings in any year from 2023 until the expiration date of the tax credit at the end of 2032, according to Roshan Weeramantry, a partner and the co-head of wealth management with Everett, Washington-based Helium Advisors.

“The energy efficient home improvement credit is yet another example of the government’s commitment to expand energy efficiency while also giving taxpayers the opportunity to reduce their tax liability. The tax credits promote energy efficiency and reduce waste,” Weeramantry said in an email. “This time period provides an opportunity for a homeowner to consider staggering their energy-efficient projects to maximize annual tax benefits. Instead of replacing all your windows in one year, a plan to stagger the installation could result in significant annual savings.”

In an annual tax review meeting with clients, advisors could bring up the available tax credits for home repairs when discussing their budgets for the following year, Wood said. For those who may not provide tax services, software like Holistiplan or other technology tools can show where the incentives may come into play, she noted.

“For a lot of advisors, they are quite frankly fearful of taxes,” Wood said. “Those observations then allow the advisors to be able to start looking at those areas specifically where they may be able to make improvements.”