Helping Your Home, the World – and Your Taxes
From replacing a furnace to remodeling a home to buying an electric vehicle, there are multiple energy-related credits potentially available to taxpayers. With a little planning and record keeping, taxpayers could save hundreds to thousands of dollars on their tax returns.
The recent Federal Inflation Reduction Act of 2022 has created and expanded a whole array of credits and rebates that taxpayers can benefit from starting in 2023.
Home improvement credit
While versions of the home improvement credit have been in the federal tax law for many years, the latest version, applicable for tax years 2023-2032, brought a significant expansion.
This credit, as its name implies, is for the purchase of home improvements and qualified energy property. This includes items such as doors, windows, insulation, HVAC systems, boilers, water heaters and more. The credit amount will total 30% of the total of all qualified costs for each qualified item or subcategory – such as a furnace or insulation – up to a maximum total credit amount of $1,200 per year. This per-year total limit is made up of all the different subcategories. And each subcategory (furnace, windows, insulation, etc.) can have a different dollar credit limit. For example:
- Max credit for furnaces: $600
- Max credit for doors: $500
- Max credit for insulation: $1,200
An additional $2,000 credit is available for heat pump water heaters and biomass stoves / boilers. The credit amount will also total 30% of the qualified costs.
This credit is available for existing principal residences only. Depending on the item purchased, installation costs may or may not be included. This credit is nonrefundable and does not carry forward, meaning in order to benefit from it the taxpayer must use the credit in the same year as purchase and have a tax liability to put it against.
Residential clean energy credit
The residential clean energy credit is another federal credit that has recently been expanded for tax years 2023-2032.
This credit is for the purchase of clean energy generating equipment, which includes solar panels, fuel cells, wind turbines, geothermal heat pumps and battery backup systems. The credit amount will total 30% of the qualified costs and has no maximum credit amount.
This credit is available for existing principal residences and new construction. Purchase and installation costs are included. This credit is nonrefundable and carries forward indefinitely, which means if a taxpayer doesn’t have a large enough tax liability in the current tax year to use it, the credit will continue to carry forward in future tax years until it is completely absorbed.
Brand new in 2023 is a state-run rebate program called HEEHRA (High-Efficiency Electric Home Rebate Act). This rebate will be available for items such as installing heat pumps, and upgrading insulation, electric panels and certain electrical appliances. The rebate amount will differ based on the work that was performed and has an annual limit of $14,000 per building. For example:
- Max rebate for heat pump installs: $8,000
- Max rebate for electric stove upgrades: $840
The rebate amounts received will depend on the taxpayer’s adjusted gross income relative to their area’s median income. The entire rebate amount is allowed if their AGI is under 80% of the area’s median income, but no rebate amount is allowed if their AGI is over 150% of the median income.
The rebate will be applicable for single-family homes and certain multifamily homes. The rebate does not carry forward – but can be used at the point of sale to offset the purchase price of the item. Each state will determine when these rebates become available (at the time of this article, Montana had not yet released an availability date but was planning to start in late 2023 or early 2024).
Clean vehicle credit
The previous clean vehicle credit had only applied for new electric vehicles, but was recently revamped to now include certain used electric vehicles. For new electric and certain plug-in hybrid vehicles, the maximum credit amount allowed is $7,500 per vehicle. For certain used electric vehicles, the maximum credit amount allowed is $4,000 per vehicle.
For new electric vehicles purchased January 1 – April 17, 2023: The credit amount is only determined by the vehicle’s battery capacity. The greater the kilowatt hour capacity is, the higher the credit amount will be.
For new electric vehicles purchased April 18 – December 31, 2023: The credit amount is determined by the vehicle’s battery capacity AND requires the vehicle’s final manufacturing destination to be within the United States.
For certain used electric vehicles purchased: The credit amount is 30% of the sales price.
For new electric vehicles, a taxpayer’s AGI must be under $150,000 for single filers and $300,000 for married couples filing jointly. For certain used electric vehicles, a taxpayer’s AGI must be under $75,000 for single filers and $150,000 for married couples filing jointly.
Additional electric vehicle requirements will include the MSRP, weight and seller information. The used vehicle credit will have an age requirement of being at least two years old. This credit is nonrefundable and does not carry forward.
The IRS suggests taxpayers to use an online tool to look up their electric vehicle information to determine the credit amount they could potentially receive. Here is a link to that website:
Several other credits will be available for tax years 2023-2032, including but not limited to the following:
- Construction of energy-efficient residential homes
- Installation of qualified energy property in commercial buildings
- Purchase of clean vehicles for businesses and tax-exempt organizations
- Installation of personal-use-qualified alternative vehicle refueling property
- Installation of business-use-qualified alternative vehicle refueling property
Please remember that these federal and state energy credits continue to change and evolve, so be sure to contact your tax advisor for further information on these credits. And know that our team here at JCCS is always ready to help you.
In the meantime, here are a few tips to consider:
- When applicable, spread out larger projects over two or more years to max out the annual credit limit each year.
- If you’re wanting to replace both insulation and HVAC systems, upgrade the insulation first to help determine what HVAC system would then be best.
- Verify that the new construction property meets the federal requirements to qualify for these credits, and save all invoices, stickers and/or tags that show the applicable energy ratings.
- Any state-level rebates will reduce the costs used to calculate the related federal energy credits.
* This article is not a complete listing of all the details related to this business / accounting topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.
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