On October 24, 2024, the Internal Revenue Service (IRS) released guidance on energy-efficient home improvement credits. The IRS explained the qualifications and rules for improving your home and making it more energy efficient.

The IRS released both proposed regulations and other guidance. The IRS information explains specific arrangements for the Energy Efficient Home Improvement Credit (EEHIC) and the Residential Clean Energy Credit (RCEC).

The credit generally allows homeowners a savings equal to 30% of expenses related to energy efficient improvements on their home. These improvements have a credit limit of up to $1,200 for most qualifying expenses. However, a separate credit limit of up to $2,000 is applicable for heat pumps, biomass stoves and boilers.

The credit is available if you do not have more than 20% business use of your home. This credit is scheduled to last until December 31, 2032.

The home improvements may include exterior doors, windows, skylights and insulation. The cap is $250 per door (or $500 for a maximum of two doors), $600 for windows and skylights and insulation cannot exceed the $1,200 total limit. A home energy audit qualifies for 30% credit up to $150.

Home improvement items must meet specific energy efficiency requirements. Most insulation must comply with the International Energy Conservation Code (IECC) requirements.

Examples of heating and cooling equipment includes heat pumps, air conditioners, water heaters and furnaces. These generally must meet the Consortium for Energy Efficiency (CEE) standards. Oil furnaces or hot water boilers qualify if they meet the 2021 Energy Efficiency criteria.

Labor costs can be included for installing new air-conditioners, water heaters, furnaces or heat pumps. The labor for many building improvements like windows, skylights, doors and insulation does not qualify.

The credit must be claimed in the year that improvements are installed. Components are expected to last for at least five years. You should file IRS Form 5695, Residential Energy Credits, Part II, with your tax return to claim these energy improvement credits.

The RCEC is a credit equal to 30% of the cost for solar panels, wind turbines and some battery storage systems. The 30% credit is available until 2032 and is offered at a lower level in 2033 and 2034. The RCEC may be carried forward.

Solar heating for swimming pools or hot tubs does not qualify for a credit. The RCEC solar panels, wind turbines or batteries must meet energy efficiency standards. Batteries must have a minimum capacity of three kilowatt-hours to qualify. The labor costs to install solar panels, wind turbines or batteries may also be included in the total amount qualifying for the 30% credit.

To claim the RCEC, you should file IRS Form 5695, Residential Energy Credits, Part I with your tax return.

The IRS reminds taxpayers that all qualified property must be new. Used property does not qualify for the energy credit.

2025 Tax Tables, Exemptions and Deductions

In Rev. Proc. 2024-40; 2024-45 IRB 1 (22 Oct 2023), the IRS published tax tables, exemptions and deduction limits for 2025. Even though inflation was reduced for the mid-2023 to mid-2024 base period, there are substantial increases in many tax provisions.

The standard deduction will be $30,000 for married couples filing jointly and $15,000 for single individuals. The head of household standard deduction increases to $22,500. All three standard deductions were nearly doubled for 2018 and later years by the Tax Cuts and Jobs Act (TCJA).

Each taxpayer must calculate both regular and alternative minimum tax (AMT) amounts. The tax payable is the higher of the two numbers. The 2023 AMT exemptions are $137,000 for married couples and $88,100 for single individuals. The AMT exemption is phased out for married couples with income over $1,252,700 or for single individuals with income over $626,350. The AMT tax is 26% at the lower level and 28% over $239,100. 

Cafeteria plans are available for medical reimbursement of qualified expenses. The flexible spending account (FSA) plan limit for 2025 is $3,300.

Charities are permitted to transfer token gift premiums to donors who make gifts above a specific level. In 2025, a donor who makes a gift over $68.00 may receive a premium with the logo or other identification of the nonprofit and a value of $13.60 or less. Donors who make larger gifts may receive a premium up to 2% of the value of the gift but cannot exceed $136.

The estate tax basic exclusion amount increases from $13.61 million to $13.99 million. A couple in 2025 may have an estate of $27.98 million with no transfer tax. 

Special-use agricultural land under Sec. 2032A may qualify for $1.42 million of reduced value. If an estate qualifies for an installment payment of the estate tax under Sec. 6166, the 2% interest amount is levied on $1.90 million.

Finally, the annual gift exclusion changes to $19,000. This is a “per donor-per donee” exclusion. An individual or couple with a large family may make substantial tax-free transfers each year using the annual gift exclusions.

American Council on Education Urges Reform of Endowment Tax

On October 15, 2024, the American Council on Education (ACE) and other nonprofit organizations sent a letter to members of the House Ways and Means Committee. The nonprofit organizations urged a reform of the 1.4% endowment tax and asked that Pell Grants be nontaxable.

The Tax Cuts and Jobs Act of 2017 created a 1.4% excise tax on net investment income for certain private colleges and universities. These colleges and universities have more than 500 tuition-paying students and endowments of at least $500,000 per student. The IRS data shows that the number of colleges and universities subject to the 1.4% excise tax increased by 76% over the past three years.

The ACE group stated, "The endowment tax takes money directly away from student financial aid, teaching, research, and numerous other mission-focused activities. It also undermines institutional philanthropic efforts to further expand generous financial aid offerings for students."

The nonprofit groups urged the Ways and Means Committee to either "repeal the tax or reform it in ways proposed under the Higher Education Endowment Tax Reform Act.” The reform of the 1.4% excise tax would allow colleges and universities to have an increase in student scholarships.

The letter also addressed the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit noting that they are complicated and confusing. This is especially a problem for low-income students who lack access to expert tax advice.

ACE urges reform of the AOTC and lifetime learning credit into two different components. The first would be similar to the current AOTC with a credit of $2,500 (partly refundable) available to students who are enrolled at least half-time in an undergraduate program. The second part of the new AOTC would be a nonrefundable credit for up to $2,000 of eligible expenses for nontraditional students, graduate students and lifetime learners. The proposal would limit the credits to a lifetime cap of $15,000.

The third request by ACE was to repeal the taxability of Pell Grants. It noted, "Eliminating the tax on Pell Grants would simplify the tax code and allow low-income students to retain more of this vital financial aid, helping them better cover the cost of college."

ACE also notes that there is a limit for the benefit of AOTC if you receive a Pell Grant. The offset provision for AOTC affects an estimated 550,000 students each year. They receive Pell Grants and therefore have limits to "aid available through the AOTC for students with some of the greatest financial need."

Applicable Federal Rate of 4.4% for November: Rev. Rul. 2024-24; 2024-45 IRB 1 (15 October 2024)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2024. The AFR under Sec. 7520 for the month of November is 4.4%. The rates for October of 4.4% or September of 4.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”