U.S. Department of the Treasury

As part of President Biden’s Investing in America agenda, American families can lower their energy costs by upgrading home appliances, insulating their homes, and making energy-efficient improvements thanks to a historic investment from President Biden’s landmark Inflation Reduction Act (IRA). 

The IRA allocates $8.8 billion to the U.S. Department of Energy’s (DOE) Home Energy Rebate programs. The Home Efficiency Rebates (HOMES) program assists homeowners and renters with whole-house energy-saving retrofits. The Home Electrification and Appliances Rebates (HEAR) program helps homeowners and renters implement energy-efficiency measures, including transitions to electric appliances.¹

In addition to the rebate programs, the IRA expanded and extended the Energy Efficient Home Improvement Tax Credit, also called the 25C tax credit, including by increasing the maximum credit amount and eliminating the lifetime limit.²

Each of these opportunities can reduce the costs of making energy-efficient upgrades to homes. In some cases, a household will be able to receive a home energy rebate and also claim a tax credit on the remaining costs of the same upgrade, providing additional savings. 

Key takeaways

• When DOE Home Energy Rebates are applied to a project or product, they are treated as reductions in the purchase price rather than as income for tax purposes. Therefore, households that receive DOE Home Energy Rebates should not report the rebates as income on their income tax returns.³ 
• When a 25C tax credit is applied to a project or product that has been subject to a DOE Home Energy Rebate, the credit amount is determined based on the adjusted purchase price after it has been reduced by the amount of the rebate. For the HOMES program, the rebate amount is applied proportionately across the set of energy-saving measures. Examples are provided below.
• In many cases, homeowners and renters can combine DOE Home Energy Rebates with tax credits to reduce energy-efficiency improvement costs. However, there are limitations:
  • The HOMES and HEAR rebates cannot be combined with each other, nor can they be combined with other federal grants for the same technology upgrade or project. 
  • A federal rebate, or a combination of a rebate and tax credit, cannot exceed the total cost of the home improvement project or product.

Further information regarding the Home Energy Rebates programs is available on DOE’s website. Further information on the 25C tax credit is available on IRS’s website.

Uses and restrictions

As provided in DOE guidance, Home Efficiency Rebates eligibility depends on the project meeting either the modeled or measured energy savings threshold. The predicted (modeled) energy savings of the home upgrade will need to achieve at least 20 percent energy savings to be eligible for the rebate. If projects are predicted to save at least 35 percent of energy, then those will be eligible for a higher rebate value. The measured energy savings for the home will need to achieve at least 15 percent to be eligible for the rebate.

The law does not limit HOMES rebate eligibility based on household income, but households that are at or below 80 percent of their area median income (AMI) are eligible for larger rebates.⁴ The HOMES program is available for rented, single-family, or multifamily homes, but not for new-construction homes. 

HEAR program eligibility is limited to households below 150 percent of AMI. Households at or below 80 percent of AMI are eligible for larger rebates.⁵ The law applies to rented, single-family, or multifamily homes. 

Examples of households using DOE Home Energy Rebates and 25C tax credits 

Many state and local governments and utilities have their own benefit programs that can be combined with 25C tax credits.⁶ 

The following examples illustrate how DOE Home Energy Rebates and the 25C tax credits can be used to reduce the cost of energy-saving home upgrades.⁷

Example 1: HOMES rebates with all retrofit measures eligible for 25C tax credits

If a taxpayer purchases item(s) eligible for both a HOMES rebate and 25C tax credit, the taxpayer may make a pro rata allocation of amounts received as rebates to individually itemized expenditures as a share of total project cost in determining the amounts paid or incurred for such items under § 25C.⁸

For example, Anthony Evans receives a $2,000 rebate for a whole-house energy-saving retrofit that costs $5,000 in 2024.  The retrofit consists of a $3,000 heat pump and $2,000 of insulation that he installs in 2024. ⁹

• The rebate is proportionately allocated so 60 percent¹⁰ is applied to $3,000 in qualifying expenditures for a heat pump ($1,200 of the $2,000 rebate) and 40 percent¹¹ is applied to $2,000 in qualifying expenditures for insulation ($800 of the $2,000 rebate).
• Evans may treat the amount paid or incurred for the heat pump and the insulation as $1,800 ($3,000 less the $1,200 allocated portion of the rebate) and $1,200 ($2,000 less the $800 allocated portion of the rebate), respectively, for purposes of the 25C tax credit, when filing his 2024 tax return.
• After applying the 25C tax credit equal to $540 for the heat pump and $360 for the insulation, Evans’ total project cost is reduced to $2,100. 

Table 1: Allocated rebate and 25C tax credit amounts for Anthony Evans

Example 2: HEAR rebates with all retrofit measures eligible for 25C tax credits

Taxpayers who receive rebates under the HEAR program who are also eligible for the 25C tax credit must reduce the amount of qualified expenditures used to calculate the 25C tax credit by the amount of the rebate from the program. 

For example, if Sofia Joseph purchases a new heat pump water heater for $2,000 and receives a $1,000 rebate through her state’s HEAR program, she may claim a 30 percent 25C tax credit on the remaining $1,000, resulting in a tax credit of $300.

Table 2: Eligible rebate and 25C tax credit amounts for Sofia Joseph

Example 3: HOMES rebate with some retrofit measures eligible for 25C tax credits

The Winthrops are a middle-income family undertaking a home retrofit. 

• They begin with a home energy audit that costs $450.
• They then insulate their attic for $2,500.
• They purchase an eligible heat pump for $3,000 and install a smart thermostat for $200.
• The total cost is $6,150. 

With a predicted energy saving of more than 20 percent (but less than 35 percent) of their home energy use, the Winthrop family is eligible for a HOMES rebate of $2,000 ($2,000 or 50 percent of the total project cost, whichever is less). 

Since the Winthrops receive the rebate as an upfront discount, the real upfront cost of the technology for the retrofit is $4,150.¹² Since the home energy audit, attic insulation, and heat pump are eligible for 25C tax credits of up to 30 percent of the after-rebate cost, the Winthrops can claim a $1,204.50 tax credit when filing their taxes.¹³ Table 3 below outlines the eligible tax credit amounts the Winthrops receive for each item.

Table 3: Allocated rebate and 25C tax credit amounts for the Winthrops (all numbers are rounded to the nearest dollar)

After receiving the HOMES rebate and applying tax credits to each eligible item, the Winthrop family was able to reduce what would have originally been a $6,150 home improvement project to a net cost of $2,945. 

Since the 25C tax credits are nonrefundable, the Winthrops were only able to claim the credits because they had sufficient tax liability to do so. 

In this example, the smart thermostat is part of the retrofit receiving a HOMES rebate, but it does not qualify for a 25C tax credit.¹⁴ 

Example 4: HOMES and HEAR rebates with some retrofit measures eligible for 25C tax credits

Peter Gomez is returning to his childhood home, which he inherited, and which needs a retrofit. Peter’s household income is below 80 percent of AMI. 

• Gomez began with a home energy audit that cost $450.
• He then insulated the attic for $2,500 and installed new windows and exterior doors for $10,000.
• He purchased a whole-house heat pump for $8,000 and installed a smart thermostat for $200.
• The total cost before rebates or tax credits amounted to $21,150. 

Through the HEAR rebates, Gomez was able to recoup the entire $8,000 cost of the heat pump and $1,600 of the cost of insulating the attic, saving him $9,600 and bringing his total cost down to $11,550. 

The installation of energy-efficient windows, doors, and thermostat provided a predicted energy savings of 20 percent, which qualified him for a $4,000 HOMES rebate, further reducing his cost to $7,550. 

Gomez was then able to apply the 25C tax credits: 

• $84 off the energy audit after applying the 30 percent credit to the remaining $281 balance after the rebate.
• $270 off the attic insulation after applying the 30 percent credit to the remaining $900 balance after the rebate.

After applying both HEAR and HOMES rebates and accounting for eligible tax credits, the net cost to Gomez for his whole house retrofit was $7,196. Since the 25C tax credits are nonrefundable, Gomez was only able to claim the credits because he had sufficient tax liability to do so. 

Since Gomez was able to recoup 100 percent of the cost of his heat pump through the HEAR rebate, the heat pump was not eligible for a § 25C tax credit.

Additionally, Gomez purchased Energy Star windows, which are eligible for the HOMES rebate, but because they were not Energy Star Most Efficient windows, they are not eligible for a 25C tax credit.

Table 6: HEAR and Allocated HOMES Rebate Amounts and 25C Tax Credits for Peter Gomez (all numbers rounded to the nearest dollar)

Related resources

Additional information on these credits can be found at IRS.gov/HomeEnergy and on the Treasury Department’s Taxpayer Resource Hub.

States, territories, and Tribes will need to include plans for how they will monitor requirements when projects combine multiple funding sources. The Department of Energy’s Home Energy Rebate Administrative and Legal Requirements Document provides additional guidance.

By coordinating the use of these credits and rebates, American families will save money on select home improvement projects that can help lower their energy bills. For more information on Energy-Efficient Home Improvement Tax Credit check out this explainer and then read about how Heat Pumps Deliver Major Savings for American families.

_{[1] Home Energy Rebates will be made available to homeowners and renters by their state, territory or Tribe as soon as summer 2024. You can learn about your state’s progress toward launching rebate programs by using DOE's tracker.} 

_{[2] The expanded 25C tax credit became applicable to property placed in service on or after January 1, 2023.}

_{[3] Contractors and installers are required to include DOE Home Energy Rebates paid directly to them in their taxable income.}

_{[4] Individual states and territories, however, may limit eligibility to lower-income households. The U.S. Department of Housing and Urban Development’s Office of Policy Development and Research provides information for understanding AMI.}

_{[5] States, territories, and Tribes may limit eligibility to lower-income households, but as mandated by the Inflation Reduction Act, cannot include households making more than 150 percent of AMI.} 

_{[6] You can learn about your state’s benefit programs by visiting the DOE website and selecting your home state.}

_{[7] Note that all rebates and tax credits are subject to eligibility and requirements as laid out by DOE and IRS.} 

_{[8] For more detail on allocation, see page 6-7 of IRS Announcement 2024-19.}

_{[9] The § 25C tax credit is available for the tax year in which the taxpayer installs the qualifying property.} 

_{[10] It is 60 percent because $3,000 is 60 percent of the $5,000 expended.}

_{[11] Likewise, it is 40 percent because $2,000 is 40 percent of the $5,000 expended.}

_{[12] Taxpayers may wish to file for an extension on their federal income tax return if the value of their rebate under the HOMES measured savings pathway is still uncertain.}

_{[13] The smart thermostat is not eligible for a 25C tax credit.}

_{[14] States and territories are responsible for determining the best way to monitor this requirement when projects combine multiple funding sources. Learn more by visiting the DOE Home Energy Rebates webpage.}