Income Tax Credit Frequently Asked Questions

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1. I don't see the new tax credit reflected on the IRS website. Is this tax credit the real deal? >
2. What happened to the old Sec. 25(C) tax credit of $300? >
3. What is the Wood and Pellet Heater Investment Tax Credit? What products qualify? >
4. When does this tax credit go into effect and how long will it last? >
5. If I buy a qualifying product under a state/utility/other rebate/changeout program, do I have to reduce the amount of the federal tax credit? >
6. Can I claim both this federal tax credit and a state tax credit? >
7. What must a manufacturer's certification statement contain? >
8. Do I need a manufacturer's certification statement to claim this credit? >
9. If someone claimed the old 25(C) tax credit in past years, but they make a purchase and installation in 2021 or later that qualifies for this new credit, can they claim the new credit on future tax returns? >
10. How can I claim this tax credit on my tax return? >
11. What paperwork should a consumer retain for their personal tax records? >
12. Are installation costs included in this tax credit? >
13. Can I claim the credit for a qualified heater installed in new, secondary, or vacation homes? >
14. In the case of a newly constructed home, how does the taxpayer determine the cost of the qualifying property under Sec. 25(D)? >
15. If a homebuilder constructed a home and installed a qualifying heater in in Year 1, but the home wasn't sold and occupied until Year 2, may a taxpayer who buys that home and use it as a residence in Year 2 claim the tax credit? >
16. A taxpayer (Taxpayer A) purchases and moves into a newly constructed home in 2021 that contains a qualifying heater, and they claim the Sec. 25(D) credit in 2021. In 2023, Taxpayer A sells the home to Taxpayer B. Is Taxpayer B eligible for a credit? >

 

1. I don't see the new tax credit reflected on the IRS website. Is this tax credit the real deal?

Yes. 

You can find the mention of the new Sec. 25(D) tax credit on page 4,916 (PDF page 2,449) of this document.

This bill passed and was enacted.

Combined with the existing 25(D) language (the dates of the existing language were also changed by the recent legislation), that creates the 26% credit for wood and pellet heaters.

Existing 25(D) language >>

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2. What happened to the old Sec. 25(C) tax credit of $300?

The language enacted at the end of 2020 eliminated the Sec. 25(C) tax credit of $300, starting in 2021. If you made a purchase and installation in 2020 that qualifies for the now-expired credit, you can still claim the credit on your 2020 tax return.

The new Sec. 25(D) tax credit is not retroactive. It can only be claimed on 2021 (and beyond) tax returns.

The tax credit can only be claimed on the tax return year in which product installation is complete.

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3. What is the Wood and Pellet Heater Investment Tax Credit? What products qualify?

The Wood and Pellet ITC was created by legislation enacted by Congress at the end of 2020. It creates a new credit under Sec. 25(D) of the Internal Revenue Code. The credit covers 26 percent of purchase and installation costs in 2021 and 2022 and covers 22 percent of purchase and installation costs in 2023. 

Qualifying products are fueled by wood or pellets (biomass), heat air or water, and have an efficiency of at least 75 percent per the higher heating value (HHV) of the fuel (overall efficiency). 

See the EPA-certified heaters list to find qualifying products (look at the column for "Overall Efficiency").

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4. When does this tax credit go into effect and how long will it last?

This tax credit went into effect on January 1, 2021. It is available for qualifying purchases and installations completed between January 1, 2021 and on/before December 31, 2023. The tax credit will need to be extended past 2023 by future legislation. Consumers claim the tax credit in the year in which product installation was complete.

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5. If I buy a qualifying product under a state/utility/other rebate/changeout program, do I have to reduce the amount of the federal tax credit?

It depends on each taxpayer's situation. Below is what the IRS specifically says (from their 2013 FAQs on page 5).

Public Utility. Under § 136, if a public utility provides (directly or indirectly) a subsidy to a customer for the purchase or installation of any energy conservation measure, the customer does not include in his or her gross income the value of the subsidy. As a result, the taxpayer may not claim a credit for the amount of the subsidy that is excluded from the taxpayer’s gross income. This rule applies whether a third-party contractor receives a subsidy on behalf of the taxpayer or the taxpayer receives
the subsidy directly. Not all payments from a public utility fall within the provisions of § 136.

Rebates. Rebates generally represent a reduction in the purchase price or cost of property, and the taxpayer must exclude the amount of the rebate from the amount of the qualified expenditure on which the taxpayer calculates the tax credit. In general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate must be based on or related to the cost of the property; the rebate must be received from someone having a reasonable nexus to the sale of the property, for example, the manufacturer, distributor, or seller/installer; and the rebate must not represent payment or compensation for services.

State Energy-Efficiency Incentives. A state may provide energy-efficiency incentives to encourage taxpayers to purchase qualifying property under § 25C or § 25D. Section 136 does not address these incentives. Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy-efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute rebates or purchase-price adjustments for federal income tax purposes. 

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6. Can I claim both this federal tax credit and a state tax credit?

Yes. Also, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy/efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute as rebates or purchase-price adjustments for federal income tax purposes. 

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7. What must a manufacturer's certification statement contain?

A manufacturer's certification statement must contain the following information: 

  • The name and address of the manufacturer. Identification of the class of qualified energy property (Biomass-Burning Stove) in which the property is included.
  • The make, model number and any other appropriate identifiers of the stove.
  • A statement that the product is an eligible qualified energy property.
  • A manufacturer's certification statement must contain a declaration, signed by a person currently authorized to bind the manufacturer in these matters, in the following form: "Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete."
  • See an example of a manufacturer's certificate.

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8. Do I need a manufacturer's certification statement to claim this credit?

No, you are not required to have a manufacturer's certification statement to claim the credit. But, it is good to have if it is available. In the absence of a manufacturer's certification statement, we recommend you print out or save the appliance manual section that mentions the efficiency rating, or take a screenshot of its listing on EPA's website. 

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9. If someone claimed the old 25(C) tax credit in past years, but they make a purchase and installation in 2021 or later that qualifies for this new credit, can they claim the new credit on future tax returns?

Yes. This is a completely new tax credit not limited by the previous restrictions of Sec. 25(C). Further, there is no cap or limit on this credit.

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10. How can I claim this tax credit on my tax return?

Taxpayers may claim the credit on their federal income tax return form, starting on their 2021 return. The credit is a reduction of total income tax owed. This is a non-refundable tax credit available for individuals who pay federal taxes and who make energy-conscious purchases to improve the energy efficiency of their home.

If your tax owed is reduced to zero by this credit, but you still have money left to claim, it can be carried over to the next tax year to further reduce your tax burden in the future.

Paper Filing: The credit can be claimed on IRS Form 5695 under Residential Energy Efficient Property Credit. 

Electronic Filing: If you are using tax filing software, the credit generally will be found under the "Credits" section of the Federal portion (Home Ownership – Residential Energy Credit).

If you made a qualifying purchase and installation in a previous tax year and want to claim the credit, you need to file an amended return using IRS Form 1040-X

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11. What paperwork should a consumer retain for their personal tax records?

You should retain (1) the sales receipt and any installation paperwork and (2) the manufacturer’s certification statement (if not available, documentation that the heater is at least 75 percent HHV efficient). 

The sales receipt and installation documentation demonstrates that you purchased and completed installation of the qualifying heater during the effective time period of the credit. The retailer from whom you purchased the qualifying heater should also provide you with a manufacturer's certification statement indicating that the product qualifies for the tax credit. You aren't required to have a certification statement in order to claim the tax credit. A screenshot or printout of the product manual page listing the efficiency as at least 75 percent efficient per the HHV is sufficient.

The certification statement should contain the name and address of the manufacturer; the class of qualified energy property; the make, model number and any other appropriate identifiers of the heater; a statement that the product is eligible; and a declaration, signed by a person currently authorized to bind the manufacturer in these matters (e.g. Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete.).

Manufacturers should make this certification document available to consumers on their website, in the product packaging, or in some other easily accessible manner.

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12. Are installation costs included in this tax credit?

Yes. Installation costs are included. Sales tax can also be included.

Installation costs cover expenditures for labor costs for onsite preparation, assembly, or original installation of the qualified heater. This also includes any venting/piping/wiring to connect the heater to the home.

To ensure that your stove burns as efficiently, cleanly, and safely as possible, be sure to have it installed by a professional credentialed by the National Fireplace Institute.

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13. Can I claim the credit for a qualified heater installed in new, secondary, or vacation homes?

Yes.

Unlike the old Sec. 25(C) tax credit (now expired), you can claim this tax credit for purchasing and installing a qualifying heater in a new home and a secondary/vacation home. The secondary/vacation home cannot be an "investment property," such as a rental property that is not used by the taxpayer as a residence.

Regarding new homes, a taxpayer can claim this credit for qualifying heaters installed in an existing home or a newly constructed home.

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14. In the case of a newly constructed home, how does the taxpayer determine the cost of the qualifying property under Sec. 25(D)?

The taxpayer may request that the homebuilder make a reasonable allocation or the taxpayer may use any other reasonable method to determine the cost of the property that is eligible for the Sec. 25(D) credit. Installation costs cover expenditures for labor costs for onsite preparation, assembly, or original installation of the qualified heater. This also includes any venting/piping/wiring to connect the heater to the home.

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15. If a homebuilder constructed a home and installed a qualifying heater in in Year 1, but the home wasn't sold and occupied until Year 2, may a taxpayer who buys that home and use it as a residence in Year 2 claim the tax credit?

Yes. As long as the taxpayer begins to use the house as a residence before the tax credit expires, the taxpayer may claim the Sec. 25(D) credit in Year 2. 

Sec. 25(D(e)(8) treats an expenditure in connection with the construction or reconstruction of a structure as made when the taxpayer begins to originally use the constructed or reconstructed structure as a residence.

If the same scenario occurs with a model home, and the qualifying heater was used during the time it was marketed for sale, the taxpayer can still claim the Sec. 25(D) credit in Year 2. The expenditure is treated as made when the use of the structure as a residence begins.

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16. A taxpayer (Taxpayer A) purchases and moves into a newly constructed home in 2021 that contains a qualifying heater, and they claim the Sec. 25(D) credit in 2021. In 2023, Taxpayer A sells the home to Taxpayer B. Is Taxpayer B eligible for a credit?

No. Sec. 25(D)(e)(8) generally treats an expenditure as made when the original installation of the qualifying property is completed.

Only the taxpayer who begins the original use of the constructed or reconstructed structure as a residence or the taxpayer using the home as a residence when the property was originally installed is eligible for the tax credit.

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