A tax credit reduces the federal income tax you owe, dollar for dollar

A tax credit is an amount you subtract directly from your federal income tax bill. If you owe $3,000 in taxes and you have a $1,500 tax credit, you pay $1,500 instead. This is different from a tax deduction, which reduces the income that gets taxed in the first place. A $1,500 deduction might lower your taxable income by $1,500, but the actual tax savings depends on your tax bracket — it could be $225 or $450 or more, depending on your rate. A credit always saves you the full amount.

For homeowners, tax credits matter because several programs give credits specifically for home improvements, energy efficiency, and first-time purchases. The IRS publishes the rules for each credit, including what work qualifies, what documentation you need, and whether the credit can be carried forward to future years if you don't owe enough tax to use it all in the current year.

Key Takeaways

  • A tax credit reduces your federal tax bill by the exact amount of the credit, while a deduction only reduces your taxable income.
  • Homeowners can claim credits for energy-efficient upgrades, solar installations, and certain home improvements, but only if the work meets IRS requirements.
  • You must keep receipts, invoices, and proof that the contractor is licensed — the IRS asks for these documents if your return is audited.
  • Some credits are refundable (you get money back if the credit exceeds your tax bill) and some are not (you lose the unused portion unless you can carry it forward).
  • The rules and dollar limits for each credit change periodically, so checking the IRS website or a tax professional before starting work helps you plan correctly.

Refundable versus non-refundable credits

A refundable credit can give you money back. If your credit is $2,000 but you only owe $1,500 in taxes, the IRS sends you a check for $500. A non-refundable credit can only reduce your tax bill to zero — any unused portion disappears. Some credits are partially refundable, meaning a portion can come back to you and the rest simply reduces your bill.

For homeowners, the energy-efficient home improvement credit (formerly the residential energy credit) is non-refundable as of 2024, but the rules have changed several times in recent years. The solar investment tax credit, by contrast, is currently refundable in part. Because these rules shift, it pays to check the IRS website or speak with a tax professional before you file, especially if you made large home improvements and expect a significant credit.

Common homeowner tax credits and what they cover

The energy-efficient home improvement credit covers certain upgrades to your primary residence: insulation, exterior doors and windows, roofs, heat pumps, water heaters, and HVAC systems. The work must meet Department of Energy efficiency standards, and you need a certification from the manufacturer or installer proving it does. There is a lifetime cap on how much you can claim across all years, and the cap has changed as tax law has been updated.

The residential solar investment tax credit (ITC) covers the cost of installing a solar photovoltaic system on your home. You can claim a percentage of the installation cost — the percentage has been set by Congress and has declined over time. You do not have to own the home outright or have paid off the mortgage; you just need to be the owner when the system is installed. If you lease a solar system instead of buying it, you cannot claim the credit — the leasing company does.

The energy storage credit covers batteries and other systems that store energy from solar or the grid. Like the solar credit, it is a percentage of the cost, and the percentage changes by year. You can stack this credit with the solar credit if you install both in the same year.

What documentation you need to claim a credit

The IRS requires you to keep the original invoice or receipt from the contractor, showing the date of purchase, the description of the work or materials, and the cost. For energy-related credits, you also need proof that the product meets the required efficiency standard — usually a manufacturer's certification or a label from the product itself. If the contractor installed the work, keep their invoice showing their license number and the work performed.

You do not send these documents with your tax return, but you must have them available if the IRS audits you. An audit can happen years after you file, so keep these records for at least three to seven years. Digital copies are acceptable, as long as they are clear and complete.

If you paid a contractor in cash and have no receipt, you cannot claim the credit. The IRS requires a paper trail. If you are unsure whether your documentation is sufficient, a tax professional can review it before you file.

How to claim a credit on your tax return

You report most homeowner tax credits on Form 5695 (Residential Energy Credits), which you attach to your Form 1040. The form walks you through the calculation: you enter the cost of the improvement, confirm it meets the efficiency standard, and calculate the credit amount based on the percentage or formula the IRS specifies for that year.

For the solar investment tax credit, you also use Form 5695. If you have multiple credits in the same year, you may need to file additional forms depending on which credits you are claiming. A tax software package usually handles this automatically if you answer the questions correctly, but if you are filing by hand or have a complex situation, a tax professional can ensure you are using the right form and calculating correctly.

The year you claim the credit matters. Generally, you claim it in the year the work was completed and paid for, not the year you filed your return. If the work was done in December 2023 but you did not pay until January 2024, you claim it on your 2024 return.

Carrying forward unused credits to future years

If your tax credit is larger than the tax you owe in a given year, what happens to the unused portion depends on whether the credit is refundable or non-refundable. For non-refundable credits, you may be able to carry the unused amount forward to the next tax year and use it then, but only if the law allows it. Not all credits have a carryforward option, so check the specific rules for the credit you are claiming.

For example, if you claim a $3,000 energy credit but only owe $2,000 in taxes, and the credit is non-refundable with no carryforward, you lose the $1,000. But if the credit allows carryforward, you can use that $1,000 against your taxes next year. The IRS instructions for Form 5695 specify whether carryforward is allowed for each credit.

Changes to tax credits over time

Congress regularly updates tax credit rules, dollar amounts, and may be able to access requirements. The Inflation Reduction Act of 2022 made significant changes to homeowner credits, including expanding the energy-efficient home improvement credit and adjusting the solar credit percentage. These changes affect which improvements may have access to, how much credit you can claim, and whether the credit is refundable.

Because the rules change, the credit available for a project you completed in 2023 may be different from the credit for the same project in 2024. Before you start a home improvement project, check the IRS website or speak with a tax professional to understand what credit you may be able to claim and what documentation you will need. This helps you plan the project and keep the right records from the start.

Frequently Asked Questions

Can I claim a tax credit if I rent my home to tenants?

No. Most homeowner tax credits apply only to your primary residence or a second home you own and occupy. If you rent the property to others, you cannot claim these credits. Landlords have different tax rules and deductions available to them, but residential energy and solar credits are not among them.

What if the contractor did not give me a receipt?

You need a receipt to claim the credit. If you paid by credit card or check, your bank or credit card statement shows the transaction, but the IRS also wants the contractor's invoice showing what work was done and that it meets efficiency standards. Contact the contractor and ask for a copy of the original invoice. If they cannot provide one, you may not be able to claim the credit.

Can I claim a credit for work my spouse did themselves?

Generally, no. The credit requires you to pay a contractor or purchase materials from a retailer. Labor you provide yourself does not count. However, if you purchased materials and installed them yourself, you may be able to claim a credit for the cost of the materials, depending on the specific credit rules. Check the IRS instructions for the credit you are considering.

Do I have to claim a credit in the year the work was done?

You claim the credit in the tax year the work was completed and paid for, not in the year you file your return. If you completed the work in 2023 but did not pay the contractor until early 2024, you claim it on your 2024 return. Keep records showing both the completion date and the payment date.

What if I sell my home — do I lose the credit?

No. Once you claim a credit on your tax return, it is yours. Selling the home does not affect the credit you already claimed. However, you can only claim the credit once per improvement, so if you claimed it in a previous year, you cannot claim it again when you sell.