The energy-efficient home improvement credit is an incentive aimed at encouraging homeowners to make environmentally conscious and energy-saving upgrades to their main homes.

Understanding the specific requirements for the credit for the 2025 tax season is critical for tax pros to provide accurate guidance, especially when clients may be receiving conflicting information from other sources.

Let’s look at a real-world scenario to clarify how the energy-efficient home improvement credit works in practice.

John and Beth, a married couple, recently gave you their individual tax return documents, which include a receipt for new exterior windows and doors. John explained that they are in the process of replacing some windows and doors in their primary home over the next couple of years. The contractor offered them a discount on the windows and doors as part of a promotion running in December 2024. Although the installation will not be completed until sometime in 2025, the contractor told them that they qualify for the energy-efficient home improvement credit on their 2024 tax return. Is this accurate?

Unfortunately for John and Beth, the contractor was incorrect.

The first step to take when determining a taxpayer’s eligibility for the credit is to look at the guidance provided in §25C. Individuals are allowed a nonrefundable tax credit for eligible improvements to their primary U.S. residence that meet energy-efficiency standards and for home energy audits. The credit is available for property placed in service before Jan. 1, 2033.

Great! John and Beth meet that requirement.

Next, you need to look at §25C(a) for guidance on the allowance of the credit, which states the improvements need to be completed/installed in order for the credit to be allowed; the key word being installed. Therefore, even though the couple paid for new exterior doors and windows in 2024, the credit cannot be claimed until they are installed in 2025.

While John and Beth plan to claim the credit for replacing doors and windows, it can also be claimed for more affordable and simple upgrades that can often be done by the homeowners themselves, such as adding insulation (e.g., exterior caulking and weather-stripping). Or it could apply to more costly items like central air conditioning systems and heat pumps.

If your clients are making improvements to their home this year, make sure you have discussions with them about the work they’re doing and when. Here’s a quick at-a-glance look at the key points of the energy-efficient home improvement credit.

Key points of the energy-efficient home improvement credit

• The credit is generally equal to 30% of the sum of the amounts the taxpayer pays or incurs during the tax year for qualified energy-efficient improvements installed during the tax year, qualified residential energy property expenditures (REPEs) and home energy audits.

• The annual credit is generally limited to $3,200.

  • $1,200 for energy-efficient property costs and improvements, with limits on exterior doors ($250 per door, $500 total), exterior windows and skylights ($600) and home energy audits ($150)
  • $2,000 for qualified heat pumps, water heaters, biomass stoves or biomass boilers

• There is no lifetime limit.

• Subsidies or rebates are subtracted from the cost when calculating the credit.

• Form 5695, Residential Energy Credits, must be filed.

• There is no carryforward of any credit in excess of the annual limit, so it might be advantageous to spread the improvements over a few years.

• New for 2025, taxpayers can only claim the credit for qualifying items if they are made by a certified manufacturer and include the product identification number (PIN) on their tax return.

Help your clients plan for making home improvements in 2025

Here are a few final tips to tell your clients that will help them easily claim the energy-efficient home improvement credit during next tax season if they’re having improvements made in 2025.

• Purchase from qualified manufacturer
• Keep the PIN
• Provide the PIN to your tax preparer
• Save receipts and documentation of the purchase

January is reporting season, and the IRS issued updated guidance reminding employers that correct and consistent reporting helps prevent reclassification of a non-employee to an employee.

If audited, today’s actions, and those you made prior to hiring an independent contractor (or other nonemployee), influence tomorrow’s decisions, as Rev. Proc. 2025-10 (Rev. Proc. 2025-10) points out.

Rev. Proc. 2025-10 updates guidance on Section 530 of the Revenue Act of 1978 and supersedes Rev. Proc. 85-18.

NOTE: It is not part of the Internal Revenue Code; yet Rev. Proc. 2025-10 is the cornerstone of your ability to have “relief” from the employment tax collection and reporting, which is required for employees.

Section 530 relief provides an employer with justification for having a contactor instead of an employee, and it hinges on three requirements: reasonable basis, substantive consistency and reporting consistency.

Having a reasonable basis for hiring a contractor means an employer used judicial precedent or published rulings, past IRS audits with no employment tax assessments or long-standing industry practices to justify using a contractor instead of an employee. Industry practice is generally considered significant if 25% of the industry follows it, and a practice is long-standing if it has existed for 10 years.

Substantive consistency means that either current or past employers have treated any individual in a similar position as an employee beginning Jan. 1, 1978. Audit consideration is given to the relationship between the employer and the individual, as well as job functions, duties, responsibilities and control when looking at this element.

Reporting consistency means an employer consistently reported compensation of employees and nonemployees on the proper forms. Employers use Form 941, Employer’s Quarterly Federal Tax Return (and variations), and Form W-2, Wage and Tax Statement, for employees, while Form 1099-NEC, Nonemployee Compensation, is used for nonemployees like contractors.

Contractors would not have withholdings for FICA or be included in the annual Form 940, Employer’s Annual Federal Unemployment Tax Return. By using the proper form, the reporting consistency requirement is met, and Section 530 relief could apply if needed.

Section 3.07 and 3.08 of the documents has details on nuances of the reporting of certain types of nonemployees or dual-status individuals.

An employer’s actions – using reasonable basis and substantive consistency for a contractor and reporting consistency for both employees and contractors – provides further protection from worker reclassification in an audit by qualifying for Section 530 relief.

Nuances included in the updated Rev Proc. include a definition of an employee, which includes corporate officers, individuals with common law employee status, statutory employees and certain government officials [§3121(d)(1), §3121(d)(2), §3401(c), §3121(d)(4) & §3121(d)(3)].

If a taxpayer qualifies for Section 530 relief, the IRS will abate assessed liabilities and refund payments related to worker reclassification issues.

Question: In 2023, Remy hired a home energy auditor to identify which energy efficiency improvements should be installed in his principal residence located in the U.S. He claimed the home energy audit credit on his 2023 tax return. His brother Erek had a home energy audit for his principal residence in 2024 and wondered if he can claim the same credit. He heard the rules to claim the credit have changed. Can Erek claim the energy home efficient improvement credit for the costs of the home energy audit performed in 2024?

Answer: It depends. Beginning Jan. 1, 2024, home energy audits must be performed by a qualified home energy auditor or under the supervision of an auditor. The qualified home energy auditor must be certified by a qualified certification program at the time of the audit (Notice 2023-59). To locate one of the qualified certification programs, check out the list on the Department of Energy’s website. If Erek meets this requirement, he may be eligible to claim the credit.

For home energy audits conducted between Jan. 1, 2023, and Dec. 31, 2023, the auditor is not required to be a certified home energy auditor.