For homeowners and bill-paying renters, the cheapest way to save money on utilities is to reduce consumption. In summer, raising the temperature setting on your air conditioner or using a high-speed floor fan on all but the hottest days can drastically cut air conditioning costs. In winter, you can really trim your gas or oil bill by wrapping your windows, lowering your thermostat a few degrees, and settling into your favorite sweater.
Such fixes are fast, easy, and effective. But they don’t permanently reduce your fossil fuel-burning appliances’ carbon footprints or improve your home’s ability to retain warm or cool air. To make a lasting, meaningful difference in your home’s energy profile, more involved – and often expensive – home improvements and upgrades are required.
The good news is that federal, state, and local governments want your home to be more efficient and Earth-friendly. Surprisingly, so do many utility companies which, after all, earn money whenever your furnace or air conditioner kicks in.
Federal, state, and local tax credits and other financial incentives partially offset the cost of a slew of green energy and home efficiency projects, helping more homeowners finance them out of their savings or afford the principal and interest payments on FHA 203k renovation loans. Here’s a look at the present lineup of federal tax credits and incentives, plus a representative slice of the hundreds of state and local credits and incentives available today.
Federal Green Energy & Home Efficiency Tax Credits/Incentives
Most of these green energy and home efficiency tax credits are valid through the end of 2016, with the exception of the solar energy generation credit (available through 2021) and the EEM program (available indefinitely). They are offered by the Federal Government and are available to any U.S. homeowner who files a federal tax return. Unless otherwise noted, you can apply for each credit by filing IRS Form 5695 with your federal tax return.
olar Energy Generation
Solar water heaters and photovoltaic solar electricity generation systems (solar panels) use the carbon-free power of the sun to heat water or generate electricity. They both qualify for a tax credit equal to 30% of the equipment and installation costs through 2019, with no cap on credit size. In 2020, the credit decreases to 26% of the total equipment and installation costs. In 2021, the credit further decreases to 22%, and expires completely on December 31st of that year. The credit can be claimed on existing and new construction homes (including second homes), but not on rental properties.
- Solar Water Heaters: To qualify for the credit, solar water heaters must generate at least half their energy from solar and must be certified by the Solar Rating and Certification Corporation (SRCC). However, all ENERGY STAR-rated solar water heaters qualify. Heated water must be used in the dwelling itself – swimming pool and hot tub heaters don’t count. According to HouseLogic, the typical solar water heater costs $8,000 to $10,000 with installation, though pricier models can cost more.
- Solar Panel Systems: Qualifying solar panels must generate electricity for the residence itself. They must meet all applicable fire and electrical safety code requirements, which can vary from place to place. According to Solar Power Authority, equipment and installation costs add up to approximately $7 to $9 per watt, or $25,000 to $30,000 for a five-kilowatt system capable of powering the average American home. However, solar panel prices have fallen considerably in recent years, and many utilities offer incentives that reduce out-of-pocket costs.
Wind Energy Generation
Residential small wind turbines use the power of the wind to generate carbon-free electricity. Though they’re compact compared to utility-scale turbines, which soar hundreds of feet into the air and sweep an area of an acre or more, they do require ample space, so they’re not ideal in densely populated urban areas.
According to the American Wind Energy Association, equipment and installation costs for a turbine sufficient to power an average home (roughly five kilowatts of generating capacity) costs approximately $30,000 and pays for itself within 6 to 30 years. Many installers offer financing options that reduce upfront costs.
Small wind turbines qualify for a tax credit equal to 30% of equipment and installation costs, with no upper limit on credit size. Qualifying turbines’ “nameplate” generating capacity (maximum capacity under ideal wind conditions) must be no more than 100 kilowatts. The credit can be claimed on new and existing primary residences and second homes, but not on rentals.
Geothermal Heat Pumps
Geothermal heat pumps draw upon the planet’s vast reserves of internal heat to generate low-carbon heat and electricity. Depending on the system, they provide hot water, air conditioning, and home heating. According to the Department of Energy, geothermal heat pumps use 25% to 50% less electricity than traditional heating and cooling systems. However, they’re pricey: According to EnergyHomes.org, it can cost $20,000 to $25,000 to install a geothermal system in a 2,500-square-foot home, with a payback period of up to 10 years.
Geothermal heat pumps qualify for a tax credit equal to 30% of equipment and installation costs, with no upper limit. Systems must meet the minimum efficiency and performance benchmarks outlined by the Department of Energy. They can generate some or all of the water heat, house heat, and air conditioning for the property. The credit applies to systems installed in new and existing primary homes and second homes, but not rental properties.
Fuel Cell Energy Generation
Residential fuel cell and microturbine systems are compact units that simultaneously generate home heat, water heat, and electricity from a single location within the home. They typically run on natural gas or biofuels (liquid fuel made from organic materials), and can operate independently of the local power grid (meaning they continue to function during blackouts). They’re quite costly – per HouseLogic, equipment costs alone can hit $50,000 for an average-sized home, and installation costs can tack on an additional $12,000 to $25,000 in existing homes (new construction installations are much cheaper).
Fortunately, these systems qualify for a federal tax credit that’s almost as good as the wind, solar, and geothermal credits. Homeowners can claim credits equal to 30% of equipment and installation costs, with a maximum of $500 per 0.5 kilowatt of generating capacity. Qualifying systems must have efficiency ratings of 30% or better and generating capacities of at least 0.5 kilowatt. The credit applies to systems installed in new and existing primary homes only. Second homes and rental properties are not eligible.
Air Source Heat Pumps
Air source heat pumps efficiently distribute heat throughout the home, providing warm and cool air (in a single system) at anywhere from one-and-a-half to three times the efficiency of conventional heating and cooling systems. In mild climates, heat pumps can entirely replace traditional furnaces and air conditioners. In cold climates, heat pumps are typically paired with oil or gas furnaces to provide adequate heat during the cold season, though newer models are capable of operating through extended sub-freezing periods. According to the Northeast Energy Efficiency Partnerships, heat pumps save an average of $459 per year when replacing electric resistance heaters and $948 per year when replacing oil-fired systems.
Ductless air source heat pumps capable of heating an entire average-sized home cost anywhere from $2,000 to $7,000 for equipment and installation. Whole-house heat pumps that use existing ducts cost $2,000 to $8,000 for equipment and installation, and heat pumps that require new ductwork can cost upwards of $20,000 with installation.
Homeowners who install air source heat pumps in existing, owner-occupied homes qualify for a $300 federal tax credit, regardless of the system’s total cost. New construction homes, second homes, and rentals do not qualify. Systems must meet the minimum efficiency requirements outlined by ENERGY STAR.
Biomass Stoves
Also known as wood stoves, biomass stoves provide home heat by burning wood pellets and other types of fuel derived from plant matter – including raw wood, in some cases. Though biomass fuels are by definition renewable, wood stoves must meet the Environmental Protection Agency’s 2020 clean air standards, and local authorities may restrict their operation temporarily on bad air quality days. Homeowners are also strongly advised to follow the EPA’s voluntary Burnwise guidelines for safe, efficient operation.
According to the Department of Energy, a pellet stove capable of heating an average-sized home costs $1,700 to $3,000. Systems that burn other types of biomass fuels tend to cost more.
Homeowners who install biomass stoves with efficiency ratings of 75% or better can qualify for a $300 federal tax credit. Qualifying systems must be installed in existing principal residences. New construction homes, second homes, and rental properties do not qualify.
Fuel Cell Energy Generation
Residential fuel cell and microturbine systems are compact units that simultaneously generate home heat, water heat, and electricity from a single location within the home. They typically run on natural gas or biofuels (liquid fuel made from organic materials), and can operate independently of the local power grid (meaning they continue to function during blackouts). They’re quite costly – per HouseLogic, equipment costs alone can hit $50,000 for an average-sized home, and installation costs can tack on an additional $12,000 to $25,000 in existing homes (new construction installations are much cheaper).
Fortunately, these systems qualify for a federal tax credit that’s almost as good as the wind, solar, and geothermal credits. Homeowners can claim credits equal to 30% of equipment and installation costs, with a maximum of $500 per 0.5 kilowatt of generating capacity. Qualifying systems must have efficiency ratings of 30% or better and generating capacities of at least 0.5 kilowatt. The credit applies to systems installed in new and existing primary homes only. Second homes and rental properties are not eligible.
Air Source Heat Pumps
Air source heat pumps efficiently distribute heat throughout the home, providing warm and cool air (in a single system) at anywhere from one-and-a-half to three times the efficiency of conventional heating and cooling systems. In mild climates, heat pumps can entirely replace traditional furnaces and air conditioners. In cold climates, heat pumps are typically paired with oil or gas furnaces to provide adequate heat during the cold season, though newer models are capable of operating through extended sub-freezing periods. According to the Northeast Energy Efficiency Partnerships, heat pumps save an average of $459 per year when replacing electric resistance heaters and $948 per year when replacing oil-fired systems.
Ductless air source heat pumps capable of heating an entire average-sized home cost anywhere from $2,000 to $7,000 for equipment and installation. Whole-house heat pumps that use existing ducts cost $2,000 to $8,000 for equipment and installation, and heat pumps that require new ductwork can cost upwards of $20,000 with installation.
Homeowners who install air source heat pumps in existing, owner-occupied homes qualify for a $300 federal tax credit, regardless of the system’s total cost. New construction homes, second homes, and rentals do not qualify. Systems must meet the minimum efficiency requirements outlined by ENERGY STAR.
Biomass Stoves
Also known as wood stoves, biomass stoves provide home heat by burning wood pellets and other types of fuel derived from plant matter – including raw wood, in some cases. Though biomass fuels are by definition renewable, wood stoves must meet the Environmental Protection Agency’s 2020 clean air standards, and local authorities may restrict their operation temporarily on bad air quality days. Homeowners are also strongly advised to follow the EPA’s voluntary Burnwise guidelines for safe, efficient operation.
According to the Department of Energy, a pellet stove capable of heating an average-sized home costs $1,700 to $3,000. Systems that burn other types of biomass fuels tend to cost more.
Homeowners who install biomass stoves with efficiency ratings of 75% or better can qualify for a $300 federal tax credit. Qualifying systems must be installed in existing principal residences. New construction homes, second homes, and rental properties do not qualify.
