Energy Efficient Home Improvement Credit: What Homeowners in Los Angeles Need to Know
The Energy Efficient Home Improvement Credit offers homeowners a valuable opportunity to reduce their federal taxes while upgrading their homes with energy-saving improvements. However, the rules have recently changed under the One Big Beautiful Bill Act (OBBBA), and the credit is now only available for property placed in service through December 31, 2025. Proper planning can maximize your savings and ensure compliance with IRS requirements.
At Velin & Associates, Inc., we guide Los Angeles homeowners, doctors, dentists, creators, and high-income professionals through the process of claiming energy tax credits while optimizing their overall tax strategy.
What Is the Energy Efficient Home Improvement Credit?
The credit allows taxpayers to claim 30% of qualified expenses for eligible home improvements, up to annual limits. The key components include:
- Qualified energy efficient improvements installed during the year
- Residential energy property expenses
- Home energy audits
Annual Credit Limits
The credit has an annual limit of $3,200 per taxpayer, and there is no lifetime cap, so you can claim the credit year after year. The breakdown of the limits is as follows:
| Improvement | Annual Limit |
| Heat pumps | $2,000 |
| Heat pump water heaters | $2,000 |
| Biomass stoves/boilers | $2,000 |
| Efficient AC units | $600 |
| Efficient furnaces/boilers | $600 |
| Efficient water heaters | $600 |
| Electric panel/circuit upgrades | $600 |
| Insulation/air sealing | $1,200 |
| Exterior doors | $500 ($250 each) |
| Exterior windows/skylights | $600 |
| Home energy audits | $150 |
Example: A Los Angeles homeowner installs a heat pump water heater ($2,000) and upgrades insulation ($1,200) in 2025. They can claim a total credit of $3,200 for that year, fully maximizing the annual limit.
Who Qualifies?
To claim the credit, taxpayers must meet these basic requirements:
- The improvements must be installed on an existing home (not a newly built home) located in the United States.
- The property must be your principal residence.
- Improvements must meet energy efficiency standards, as certified by the manufacturer or seller.
Business Use of Home
If your home is also used for business:
- If ≤20% of your home is used for business, you can claim the full credit.
- If >20% of your home is business space, the cost of improvements must be allocated between personal and business use. The credit applies only to the personal-use portion.
Example: A dentist in West Hollywood works from a home office that is 25% of the house. They install a new energy-efficient furnace costing $2,000. Only 75% of the expense ($1,500) qualifies for the credit.
How to Claim the Credit
The credit is claimed on Form 5695, Residential Energy Credits, Part II in the year the property is installed — not the year it is purchased.
- Proper documentation, including invoices and manufacturer certifications, is essential.
- Energy property must be new, not used.
Manufacturer’s PIN Requirement
For property placed in service after 2024, the IRS now requires a Product Identification Number (PIN) for certain items:
- Heat pumps and water heaters (electric or gas)
- Central air conditioners
- Natural gas, propane, or oil furnaces or boilers
- Biomass stoves or boilers
- Panelboards, sub-panels, branch circuits, and feeders
- Exterior windows, skylights, and doors
Failure to include a valid PIN on your tax return can result in the credit being disallowed, treated as a mathematical error, and automatically adjusted by the IRS.
Tip: Only purchase from qualified manufacturers that register with the IRS and provide a PIN. Keep your receipts and documentation in case the IRS requests verification.
Subtracting Rebates, Subsidies, and Incentives
When calculating the credit, you must subtract any rebates or subsidies received from the cost of the property:
- Rebates must be tied to the cost of the property itself.
- Rebates from manufacturers, distributors, or installers count.
- State incentives may not always reduce the federal credit unless they qualify as a purchase price adjustment.
Example: A homeowner installs energy-efficient windows for $6,000 and receives a $1,000 rebate from the manufacturer. The qualified expense for the credit is $5,000, and the 30% credit is $1,500.
What Is Not Eligible
- Newly built homes
- Improvements that do not meet energy efficiency standards
- Property for which the manufacturer does not provide a valid PIN
California Nonconformity: California does not offer a similar state credit. Homeowners may see a difference between federal and state tax savings.
Planning Tips for Homeowners
- Act Before December 31, 2025 – the accelerated expiration date under the OBBBA means 2025 is your last opportunity to claim this credit.
- Use Qualified Manufacturers – ensure your equipment has a valid PIN.
- Document Everything – keep invoices, receipts, and manufacturer statements proving the property meets energy efficiency standards.
- Consider Home Office Allocation – if you work from home, calculate the personal-use portion for credit purposes.
Example: A Shopify seller in Los Angeles installs a heat pump water heater ($2,000) and an energy-efficient furnace ($600) in 2025, using only 15% of their home for business. They can claim the full $2,600 on Form 5695 for 2025.
Final Thoughts
The Energy Efficient Home Improvement Credit is a powerful way to reduce taxes while upgrading your home for comfort and energy efficiency. However, navigating the OBBBA rules, PIN requirements, and rebate adjustments can be complex.
At Velin & Associates, Inc., we help homeowners in Los Angeles, including doctors, dentists, content creators, and high-income professionals, maximize their tax benefits while staying compliant with federal rules.
For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
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