Approximately 2.3 million tax returns filed for tax year 2023 utilized the Energy Efficient Home Improvement credit (25C tax credit), according to the latest IRS clean energy tax credit statistics. Through May 23rd of the 2024 tax filing season for 2023 returns, almost 138 million tax returns had been filed with the IRS, which indicates that 1.7% of returns filed utilized the 25C credit. There are various types of improvements that can be claimed under the 25C credit; each improvement varies in its cost and credit amount. Additionally, claim rates of the 25C tax credit varies across taxpayers’ incomes as well as geographies. This post examines these data.
The 25C tax credit allows homeowners to claim qualifying energy efficiency improvements to their primary or secondary residence. Renters can also claim the credit for certain energy efficient appliance and product expenditures. The 25C credit amount is based on 30% of the improvement’s cost and is subject to the improvement’s specific credit limit. For improvements such as electric or natural gas heat pumps, heat pump water heaters, or biomass stoves/boilers, the credit limit per year is $2,000. All other home improvements, such as efficient AC units, insulation/air sealing or home energy audits are limited to a combined credit limit of $1,200, with individual limitations for each item. The total annual credit amount that can be claimed is $3,200 per year. The table below from the Department of Energy shows the available tax credit amounts for tax years 2023 through 2032.
Cost of Improvement and Usage
The credit can cover both the purchase and installation costs for heat pumps, energy efficient AC units, furnaces/ boilers, water heaters, biomass stoves/ boilers, and electric panel/circuit board upgrades. For building envelope components (insulation, doors, windows, skylights), only the purchase can be covered.
The recent IRS data indicates that the most expensive improvement claimed in tax year 2023 was the purchase and installation of electric or natural gas heat pumps at an average cost of $11,213. The costliest item that did not cover installation costs was exterior windows and skylights at $9,143.
Shown below in orange are the average costs for each 25C improvement item in the IRS data. In blue is the credit amount of each improvement, based on its average cost and applicable credit limits. For almost all items, 30% of the improvement’s cost far surpass the credit limit amounts. The only exceptions are heat pump water heaters and biomass stoves/broilers that on average do not exceed the credit limit.
For example, the average cost of installation and purchase of a biomass stove/broiler was $5,221. Taking 30% of this cost, we find a credit amount of $1,566, which is below the credit limit of $2,000 for this improvement. Compared with the costliest improvement, electric or natural gas heat pumps, 30% of the average cost is $3,364. This is above the credit limit, making the largest possible credit amount $2,000 for electric or natural gas heat pumps installation and purchase. The average credit amount, shown below in purple, was $882, well below the maximum possible credit limit of $3,200, shown in light purple.
Of the 2.3 million taxpayers that claimed the 25C credit, the most frequent improvement was the purchase of insulation or air sealing materials or system with 699,440 returns (29.9%). This improvement is the only item to the combined cap of $1,200 that also has an individual limit of $1,200. Improvements that have a combined limit of $1,200 are in the green shaded box below. The least claimed improvement was home energy audits, which also had the lowest credit limit of $150.
Income and Geographic Differences
The highest claim rate of the 25C credit by income was for taxpayers in the $200,000-$500,000 income range, with 4.83% of returns claiming a 25C tax credit. The lowest was for incomes between $1-$10,000, as 0.02% of returns claimed the credit.
Geographically, the highest claim rate of the 25C tax credit was in Maine, with 3.03% of tax returns in the state claiming 25C. The lowest rate was in Hawaii, where only 0.50% of returns claimed the credit. Usage was significantly higher in the Midwest and Northeast, as the top 10 usage rates were all located in these regions.
While Maine has the highest claim rate, Washington had the highest average credit amount at $1,191. The lowest average credit amount was in Iowa, at $743. Of particular note, Michigan and Wisconsin had low average credit amounts but were among the top ten in terms of claim rates. In Michigan, the average credit amount was $747, ranking 49th (includes DC), while the claim rate was 9th at 2.45%. In Wisconsin, the average credit amount was $761, ranking 48th, and the claim rate was 6th, at 2.51%. The reasoning for this trend could be due to the type of improvements by region but there is no IRS data published yet to clarify this hypothesis.
Additionally, usage rates could be relatively lower in the Southern portion of the U.S. because the costliest items, such as heat pumps, are not as critical as regional weather is warmer. Since this credit cannot be applied to new construction, it should also be noted that most new homes are being built with central AC, making it less likely to be claimed as a 25C improvement. Also, most homes in the North are built without heat pumps which allows for more opportunity for the cost to be claimed under 25C if such improvement is made. Nationally, the claim rate was 1.7% with an average credit amount of $882.
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