Founder | BPI® Energy Auditor Certified Professional
Global climate change is already here, but you don’t have to contribute to making it worse. If you live in the US, the federal and state government will give you tax credits for doing environmentally responsible things like buying an electric car and installing solar panels on the roof of your house.
There are over 2000 regulatory and financial incentive programs encouraging the use of less polluting and renewable power sources at the private and residential levels.
Depending on your city and state, there may be a surprising number of tax incentives and other programs helping you live a greener life.
This article explains the types of federal and state incentives available for environmentally responsible American consumers with links to relevant resources and tax forms.
Note that this is not an exhaustive list. Comprehensive databases of incentive programs are available from the Department of Energy and North Carolina State University.
Electric and Other Alternative Fueled Vehicles
No longer the preserve of nerds, hippies and overly caffeinated autistic billionaires, electric cars have become “cool.”
Electric vehicles offer several advantages over conventional petrol burning cars, including greater acceleration, less expensive refueling, and a lower carbon footprint if you own an electric vehicle long enough.
But suppose one doesn’t wish to buy an EV. In that case, incentives for other alternative fuel systems are also available, including hydrogen fuel cells, biodiesel, ethanol, and compressed natural gas.
Several states and the federal government even offer incentives for aftermarket conversion of conventional vehicles to run on alternative fuels.
California was the first state to incentivize electric cars at the turn of the 21st century.
By 2007, incentive programs were available nationwide at the federal and state level.
At present, there are approximately 229 federal, state, local, and utility/privately provided incentive programs to encourage private citizens to switch to alternative-fueled vehicles.
Programs incentivizing the use of electric and other alternatively fueled vehicles are available in most states and the district of Columbia.
In the fiscal year 2020, there were more than 30 models of electric and plug-in hybrid cars eligible for one-time federal income tax credits.
Ironically, considering its role in popularizing electric vehicles, Tesla lost its eligibility for federal tax credits in 2019 due to its high sales volume but is still eligible for state programs in 41/50 states and the District of Columbia.
A complete list of automobile models eligible for the federal alternative fuel vehicle tax credit provided by the Department of Energy, as well as links to the IRS forms and instructions on how to fill them out, can be found here and here.
The federal government also provides tax credits for installing an EV charger in your home. Instructions to claim it and a link to the actual form can be found here.
Claiming incentives at the state level isn’t as straightforward. Still, the federal Department of Energy maintains a database of incentive programs.
Residential Incentive Programs
Incentive programs for installing energy-saving equipment and appliances exist at both the federal and state level. They cover a variety of improvements to residential properties.
Through the Energy Star Program and the IRS, the federal government provides incentives for installing geothermal heat pumps, residential wind turbines, solar water heaters and solar panels, residential fuel cells and microturbine systems, and new for the fiscal year 2021, biomass burning stoves.
These incentives, explained below, and others such as energy-efficient insulation, can be claimed by filing IRS Form 5695.
The DSIRE USA database of state incentives for using alternative energy and energy-efficient equipment is maintained by the North Carolina State University’s Clean Energy Technology Center.
The provision of such incentives is highly politicized in America, with traditionally Democratic voting states providing many more incentives than traditionally Republican voting states.
Geothermal Heat Pumps
Heat pumps are one of humanity’s most brilliant and underrated inventions.
Rather than burning fuel or using potentially dangerous high voltage electricity to heat a volume of space, heat can be extracted from another volume of space using the refrigeration cycle.
Geothermal heat pumps use this technology to control the temperature of a building by stealing heat from the ground or a nearby body of water. No matter the outside air temperature, the temperature below the frost line (five to ten feet underground) remains relatively stable year-round.
By circulating water or an antifreeze solution through piping buried in the ground or at the bottom of a body of water, a geothermal heat pump removes heat from the dirt or water, moves it into the building, and works in the opposite direction.
As a result, geothermal heat pumps can provide both heating and cooling and provide hot water.
Geothermal heat pumps offer considerable cost and energy savings compared to conventional HVAC systems.
According to the International Ground Source Heat Pump Association, geothermal heat pumps can reduce energy usage between 20% and 50% and are purely electric, lowering utility expenditures.
These systems also require much less maintenance and last much longer than conventional furnaces and air conditioners.
The catch is that the systems are more expensive to install. Doing so will generally require digging up part of the surrounding land to bury the underground heat exchangers.
But once the heat exchangers are buried, they’re maintenance-free and will last between 25 and 50 years.
The Department of Energy reports that geothermal heat pumps will pay for themselves in five to ten years through energy and maintenance cost savings.
Federal and state tax incentives are available to cover part of the cost of installation as well.
Residential Wind Turbines
Wind turbines don’t have to be massive or planted in large farms.
Depending on local wind conditions, zoning laws, and economics, small wind turbines can provide part of your home’s energy needs.
The installation of a residential wind turbine requires planning and possibly heavy equipment. Therefore it may not be the type of project a homeowner should take on by themselves.
Installation services are available near most major American cities. The actual wind turbines are available from major hardware stores and on Amazon.
Solar Energy Systems
The Sun is a massive nuclear fusion reactor. The tiny amount of its light that hits the dayside of the Earth in one hour is more than human civilization will use in a century. It’s a limitless clean energy that you can use to power and heat your home!
And contrary to what a surprising number of Americans believe, solar panels don’t drain energy from the Sun.
There are two general types of solar power systems covered by federal and state incentive programs, photovoltaic solar panels and solar water heaters.
Solar Panels
Solar panels utilize the photovoltaic effect to generate electricity from sunlight; a video explanation of the photovoltaic effect by science educator Richard Khomp can be found here.
Provided local zoning and fire regulations permit their installation, modern solar panels can be installed on virtually any residential rooftop in America.
Surprisingly there are at least two residential solar panel installation services active in Fairbanks, Alaska.
Once installed, solar panels require little to no maintenance and will passively generate electricity even on a cloudy day.
And according to EnergySage.com, modern solar panels are typically rated to withstand one-inch diameter hailstones falling at up to 50 mph.
In the sunnier Southern states, a rooftop solar panel array can provide all the electricity the average American family requires.
Any extra energy produced can be sold to the local power grid. This can provide the household with an additional source of income, and in many states, an additional tax credit.
According to an analysis by the real estate firm Zillow, homes with rooftop solar panels sell for 4.1% more, on average.
Solar Water Heaters
Solar water heaters are the less famous cousin of photovoltaic solar panels.
Solar water heaters use rooftop-mounted heat collectors to heat water or an antifreeze solution and either actively or passively circulate it into a home’s existing water pipes.
Some more complicated systems can also provide home heating using a similar mechanism to geothermal heat pumps.
Solar hot water heaters can sometimes make sense for your needs. What we actually like a lot better, now that the prices have come down and the technology is better, are heat pump hot water heaters.
Where you use regular solar electricity to power them, and the whole system is arguably much less complicated. But it really depends on the specific application and situation for your goals and the home.
By using the sun to heat water rather than electricity from the local grid or burning gas, the average American family can significantly reduce utility costs and their carbon footprint.
And these hot water heaters not only save you money, but can earn you tax incentives too!
According to EnergySage, the average installation cost for a solar water heater is around $9,000 before incentives.
Federal tax incentives will cover 26% of the installation costs, reducing out-of-pocket expenses to $6,300.
If they’re available, state incentives may reduce the cost of installation by as much as another $2,000.
Residential Fuel Cells and Microturbine Systems
If you don’t want to use the Sun or free heat from the ground to power or heat your home, you can use more exotic technology and still receive tax incentives.
Federal tax incentives cover two gas-powered residential generator options, residential hydrogen fuel cells and natural gas burning microturbine systems.
Neither of these systems are widely available yet, but it’s hoped the incentive programs will increase their market share.
Residential Fuel Cells
Hydrogen gas may be the “energy carrier of the future” if a hydrogen economy ever emerges.
Hydrogen fuel cells allow hydrogen atoms to pass through a thin metal screen and react with oxygen atoms, producing an electric current and water as a byproduct.
Such systems have various applications from space travel, to automotive power, and commercial and residential power generation.
At present, in 2024, a hydrogen economy has yet to take shape, with only 53 hydrogen fueling stations available in the US and Canada. Most of them are located in California.
The production of hydrogen is also very energy-intensive and usually requires the use of fossil fuels as feedstocks.
The goal of the federal and state incentive programs is to increase consumer demand and increase investment from the private sector by increasing demand.
Microturbine Systems
A microturbine is essentially a tiny jet engine that you can use to power your home.
Commercially available microturbine systems are designed to run on either natural gas (methane) or propane, the burning of which releases carbon dioxide into the atmosphere and contributes to climate change.
So why would the government incentivize their installation? Efficiency.
The American power grid is in a poor state of repair and woefully inefficient. It’s estimated that under 30% of electricity produced in American power plants makes it to residential and commercial end customers, with most of the power being lost.
Generating power on-site at businesses and private residences is far more efficient. As with solar panels, homeowners can sell any extra electricity to the local power grid.
Biomass Burning Stoves
“Biomass Burning Stove” is a STEM term for a stove or furnace that burns stuff that used to be alive.
“Biomass fuel” can mean wood, grass clippings, weeds from your garden, peat dug out of a bog, agricultural and construction waste, manure, and even roadkill. It’s a technology humans have been using for literally hundreds of thousands of years.
Beginning in 2021, the United States federal government started offering tax incentives for its use in heating private residences.
Because biomass burning systems use fuel that was recently alive, it’s considered “carbon neutral,” meaning they don’t increase or decrease the amount of carbon in the atmosphere.
Biomass fuels are derived from sources replenished on a human time scale, often a matter of months, and are therefore considered renewable.
Biomass systems are also ideal for “off the grid” living as they require no external infrastructure.
The downside is that the widespread burning of biomass negatively affects local air quality due to the smoke produced.
The federal tax incentive covers a wide variety of biomass burning systems, ranging from a simple wood-burning Franklin stove to more modern home steam-driven power generators.
Modern biomass burning boilers are primarily self-contained and require less maintenance than their historical counterparts from the 19th and early 20th centuries. They’re also commercially available, with units ranging from $2,500 to $11,000.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit was introduced on January 1st, 2023. This program offered a 30% tax credit for homeowners conducting energy-efficient home improvements.
Some of the qualifying expenses for this tax credit include:
- Qualified energy-efficient home improvements installed within the year
- Home energy audits
- Residential energy property expenses
The maximum limit for this tax credit was capped at $2,000 for select biomass stoves, heat pumps, and boilers. However, the limit will reset annually until 2032.
Also, you can claim a maximum of $1,200 for energy-efficient home improvements and energy property costs.
However, there is a limit of $250 per door and a total of $500, $150 for home energy audits, and $600 for windows.
You qualify for the energy-efficient home improvement credit for your main home if it’s where you live most of the time. The home must also be in the U.S. and your primary residence.
Read more about the application here.
Other Residential Energy and Efficiency Incentives
Let’s say you want to save energy and money, but you don’t want to make significant modifications to your home or buy an alternative fuel vehicle.
In that case, there are a surprising number of things you can do to improve the energy efficiency of your homes, and the federal and state governments will cover part of the costs.
A careful examination of IRS Form 5695, “Residential Energy Credits,” shows allowances for several less extreme residential improvements, including by not limited to the energy-efficient insulation material, energy-efficient windows, exterior doors, skylights, and the installation of metal or asphalt roofing with built-in cooling granules.
It’s important to note that federal incentive programs don’t cover the cost of installation labor.
Conclusion
Like it or not, global climate change is real, it’s humanity’s fault, and we are already feeling its effects.
It may be too late to prevent the damage, but you don’t have to contribute to making it worse.
Making environmentally friendly changes can be expensive, but federal and state incentives can lessen the initial financial cost.