Deductions & credits

In TurboTax, open your tax return

• Click on Federal in the left-hand column, then on Deductions & Credits on top of the screen
• Scroll down to All Tax breaks, locate the section Your Home and click on Show more

The deduction for a heat pump must meet specific qualifications and is taken on Form 5965.

Heat pumps and biomass stoves and boilers with a thermal efficiency rating of at least 75% qualify for a credit up to $2,000 per year. Costs may include labor for installation.

Form 5695 (Residential Energy Credits) is used to calculate tax credits for energy efficient improvements and alternative energy equipment.

To add or remove this form:

1. Open or continue your return
2. Inside TurboTax, search for this exact phrase including the comma and spaces: 5695, residential energy credit
3. Select the Jump to link in your search results
4. At the bottom of the Energy-Saving Home Improvements screen, answer Yes, then select Continue
   • To delete the 5695, answer No, select Continue, and then answer Yes on the following screen to confirm the deletion
5. Follow the instructions to enter your energy-saving improvement costs

The IRS offers several ways for taxpayers to cut their tax bills through investing in certain energy-efficient appliances and home improvements. This can include upgrades like energy-efficient water heaters, furnaces, air conditioners, windows, doors and similar investments, but also clean vehicles and related equipment.

Installing alternative energy equipment in your home such as solar panels, heat pumps, windows, doors and roofing can qualify you for a credit up to 30% of your total cost. 

1. Energy-Efficient Home Improvement Credit

Recently renamed from the Nonbusiness Energy Property Credit, this tax credit originally expired at the end of 2021. The Inflation Reduction Act changed the fate of this credit by not only reinstating it, but substantially expanding the impact starting in 2023 through 2032.

The old rules apply for 2022, essentially extending the previous credit by one year. Afterwards, the credit for the costs of installing certain energy-efficient upgrades such as home insulation, windows, doors, roofing, and more increases from 10% to 30%.

 It will also be expanded to cover certain types of stoves, boilers, electric panels, and other related equipment with a greater set of limits (up to $1,200 per year vs. the previous $500 lifetime limit). If you can manage to spread your qualifying home improvement projects throughout the credit’s current, upgraded availability (through December 31, 2032), you could net up to $12,000 in tax credit value over ten years through the Energy Efficient Home Improvement Credit.

The annual limits on the credit for specific types of qualifying home improvements will be enhanced starting in 2023 as well. Specifically, credit limits will be the following:

• Home energy audits: $150
• Exterior doors: $250 per door (up to $500 per year)
• Exterior windows and skylights, central A/C units, electric panels and related equipment, natural gas, propane and oil water heaters, furnaces or hot water boilers: $600
• Heat pumps and biomass stoves and boilers: $2,000 (this one category qualifies to go above the $1,200 annual limit)

If you meet the criteria of an energy tax credit covered above, you generally can claim the credit on your return subject to certain limitations.

 Tax credits reduce the amount of taxes you owe dollar-for-dollar. For example, if you owe $1,000 in federal taxes but are eligible to claim a $1,000 tax credit, your net tax liability drops to zero. These energy credits are non-refundable credits meaning that they can lower your taxes but won’t result in a refund.  

You may have the opportunity to roll over unused portions of tax credits to future years, allowing you to claim their full value down the road when you have additional tax liability.

How do you claim energy efficient tax credits on your tax return?

To claim the credits, you'll need IRS Form 5695.

Click here for additional IRS information regarding Energy Efficient Home Improvement Credit.

Click here for additional information on Energy Saving Credits.

Click here for "What is IRS Form 5965?"