Yes, you can indeed receive a tax benefit for installing new energy efficient windows on your house – provided that certain conditions are met. However, rather than this benefit being a deduction from your income, it instead takes the form of a reduction in the tax you would otherwise pay (a tax credit, in other words). This kind of tax credit has been available since 2006, but a recent tax law change has expanded the benefit significantly for windows installed from 2023 onwards.
Up until the end of 2022, this tax credit was known as the Nonbusiness Energy Property Credit, and it allowed you to claim 10% of the cost of exterior windows (and skylights) up to a maximum limit of $200. However, a lifetime credit limit of $200 for windows applied for all tax years after 2005. Thus, if you had replaced your windows in 2007 and claimed the $200 credit at that time, you would not be able to claim any credit for other windows you may have installed in later years.
Starting in the 2023 tax year, this credit was renamed to become the Energy Efficient Home Improvement Credit and the credit was extended to the end of the 2032 tax year. This new version of the credit allows you to claim 30% of the total cost of new windows and skylights installed during the year, up to a maximum limit of $600. The lifetime limit for windows is removed, and thus over the course of several years you could conceivably replace all of the exterior windows in your house while claiming a tax credit of up to $600 each year.
In all cases, to be eligible for either tax credit, the windows (and skylights) you install must meet the requirements for the Energy Star Most Efficient certification.
The two credits described above can only be claimed in relation to an existing home, and not for a newly-constructed home. A credit may not be claimed for a home that you do not use as your principal residence. This means, for example, that landlords are never able to claim the credits for improvements they may have made to homes that they rent out to tenants but do not use as a residence for themselves. On the other hand, if you are using a rented home as your principal residence and install energy efficient windows on that home, you may be able to claim the tax credit. In addition to the principal residence requirement, the home must be located in the United States.
Neither of the credits may be claimed if the property is used entirely for business purposes. However, you can claim the full amount of the credit if your business use of the property is 20% or less. If your business use is greater than 20%, you will need to calculate the credit based on the portion of your expenses that relate to nonbusiness use.
When calculating the amount of the Energy Efficient Home Improvement Credit for the windows that you have installed or replaced, you may not include the associated labor costs. It is also important to note that any amount of the credit that exceeds the annual limit of $600 cannot be carried forward to a later year.
In addition, the credit itself is nonrefundable. This means that it can only be used to offset your tax liability for the year in which you installed the windows, and it cannot reduce that tax liability below zero. In other words, you will not receive a refund if the amount of the credit exceeds your tax liability. Any extra credit is thus lost.
Example: In 2023, Fred bought and installed energy efficient windows and skylights in his house at a total cost of $3,200. The windows and skylights all met the applicable energy efficiency and other requirements for qualifying for the Energy Efficient Home Improvement Credit. 30% of Fred’s total $3,200 of expenditures for windows and skylights is $960, but the $600 limit for all windows and skylights applies. Thus, Fred’s expenditures for windows and skylights qualify him to claim only a $600 credit. Because of some shares of stock Fred sold in 2023, his total tax liability for 2023 is $200. The net result is that $200 of Fred’s $600 for the Energy Efficient Home Improvement Credit is applied against the tax he owes from his stock sales. The remaining $400 of the credit is lost because the Energy Efficient Home Improvement Credit is nonrefundable.
As we have seen, although the tax laws allow you to offset the cost of installing or replacing windows in your home, some careful planning in advance would be very helpful to ensure that you make the most of the available benefits.