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How Can Energy Tax Credits Help You?

November 15, 2023

When you think about saving money or making smart financial choices, energy tax credits may not be the first thing that comes to mind. Yet, understanding and capitalizing on these incentives can be a game-changer for your financial future, not to mention your environmental impact. As individuals, families, and businesses increasingly focus on sustainable energy solutions, it makes sense to capitalize on the financial benefits that come with them. Learn more about the federal government’s energy tax credits, what types are available, and how you can claim them to save money on your taxes.

What Are Energy Tax Credits?

First, make sure you understand the difference between a tax deduction and a tax credit. A deduction reduces the amount of income subject to taxation. Tax credits are more powerful because they reduce your tax liability dollar-for-dollar.

Energy tax credits are incentives provided by the federal government and some state and local programs to promote energy-efficient solutions. The aim is to encourage a shift away from fossil fuels and toward renewable energy sources. Energy tax credits allow individuals and businesses to cut tax payments while benefiting the environment.

Types of Energy Tax Credits

The Inflation Reduction Act of 2022 expanded existing tax credits to make them even more lucrative. Understanding each one can help you determine what applies to your situation.

Solar Tax Credit

Thanks to the Inflation Reduction Act, you can claim up to 30% of the cost to buy and install solar panels. Take one situation where a homeowner installed solar panels for $50,000. The 30% energy tax credit came to $15,000, which, in this individual’s tax situation, cut what they owed the IRS in half. This put money back in the homeowner’s pocket while allowing them to enjoy all the benefits of a solar-powered home, including drastically reduced energy bills for decades to come.

Electric Vehicle Tax Credit

The electric vehicle (EV) tax credit is another opportunity gaining significant attention. The promise is that you can get up to $7,500 back on your tax return, but the EV credit is not straightforward.

  • First, the cost of the electric vehicle matters. A regular car cannot exceed $55,000; for an SUV, the limit is $80,000. These price caps are vital to note because exceeding them automatically disqualifies you from claiming the credit.
  • Second, the electric vehicle must be US-made and meet specific battery requirements. Make sure your chosen model checks all the boxes.
  • Timing is another point to consider. To claim the credit, you must purchase the electric vehicle within the same calendar year as filing your taxes.

A word of caution—don’t rely on car dealerships for this information. While they might advertise the $7,500 credit as a selling point, they are not tax professionals. It’s up to you to verify that you meet all the qualifications for the credit before filing your tax return.

Home Energy Tax Credits

Water heaters, HVAC systems, exterior doors and windows, and insulation fall under Home Energy Tax Credits. They’re less expensive upgrades than a full solar array, yet they still qualify for a 30% tax credit (with yearly and annual limits). This offers a cost-effective option for homeowners to boost energy efficiency while saving on taxes.

Energy-Saved Credits

The last category involves conducting an energy audit of your home. This audit assesses your home’s efficiency and what improvements you can make. You can receive a $150 credit just for doing the audit. The total amount you can claim depends on what changes you make and your income. Lower-income households can receive up to an $8,000 credit, while the credit for higher incomes is capped at $4,000.

Eligibility and Limitations

It’s crucial to note that not all energy-efficient projects qualify for tax credits. For instance, home improvements must usually take place in your primary residence, and the improvement or system must meet specific criteria. Your income also matters, as pointed out with energy audits.

In addition, these tax credits are not static; they can change over time, so it’s important to check with the official IRS website before finalizing any energy-related purchases or improvements.

How to Claim Energy Tax Credits

Claiming these incentives is not simply a matter of installing an eligible system; you need to follow these steps:

  • Determine the type of credit you aim to claim—solar installations, electric vehicles, appliances/home improvements, or energy-saved measures.
  • Know that energy credits are stackable. For instance, if you install solar panels, you might also be eligible for additional energy-saved credits. Previously, energy credits had a lifetime limit, but current provisions allow for stacking with much higher annual and lifetime limits.
  • Consider your income and state of residence, which can affect the size of the tax credit you qualify for. Lower-income households generally receive higher credits, but even high-income families can still claim substantial amounts. In addition to federal credits, various states and utility companies offer incentives, making it a three-tiered system: federal, state, and local.
  • Budget for the initial expense of your chosen project. While credits can significantly offset costs, you still need to pay for the improvement upfront. You claim the credit after filing your taxes, so it’s important to budget for the initial expenditure.
  • Keep all receipts and contracts detailing the product’s costs and installation details.
  • File the proper form. For individuals, IRS Form 5695 is the form to use when claiming residential energy credits. Businesses will need to use IRS Form 3468.
  • Consult a financial advisor when filing your taxes. The complexities involved in understanding and claiming energy tax credits can be daunting. Professional guidance helps you stack different credits to get the most from the current tax incentives. Speak with a financial planner who can offer expert advice based on your situation.

Maximize Energy Tax Credits With Nelson Financial Planning

At Nelson Financial Planning, we specialize in crafting personalized financial plans backed by over three decades of experience in the financial services sector. From retirement planning and wealth management to comprehensive tax planning, we provide a one-stop solution for all your financial needs. As your trusted financial fiduciary, we can guide you through the intricacies of energy tax credits, ensuring you maximize these opportunities.

Ready to change your life with a successful financial plan that provides peace of mind for the future? Contact our office in Winter Park, FL, at 407-307-3061 for more information.