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Federal Tax Credits for Home Energy Projects

Investing in your home’s future energy needs is an exciting opportunity, but, depending on your project(s) of choice, it can be expensive. However, because making your home more resilient and energy efficient benefits more people than just you and your loved ones, there are cases when you can receive a federal tax credit for your project. The government gives these credits because it wants to reward certain behaviors (such as promoting environmentally-friendly energy), and tax credits can help reduce the cost of these potentially expensive projects.

What is a Tax Credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax you owe. For instance, if you owe $2000 on your income tax, a $1500 credit will reduce that amount owed to $500. In some cases, a credit may be refundable, which means that you would still receive the amount of the credit even if you owed $0 in taxes. So these credits can be very valuable and may be helpful in getting your home energy project off the ground.

There are several types of potentially available credits, and we will examine some of the more popular ones in this article.

Residential Energy Efficient Property Tax Credit

Perhaps the most well-known credit is the Residential Energy-Efficient Property Tax Credit. This federal program offers a credit for investments in property that generates renewable energy and is in place through at least 2021. The amount of the credit fell in 2020 from 30% to 26%, and it will decrease further to 22% in 2021. So if you are thinking of taking advantage of this credit, you should consider doing it as quickly as possible to get the highest tax benefit.

How do you know what property counts? The IRS guidance suggests that “qualified” property to claim the credit may be for the following types of equipment: solar electric panels, solar water heater equipment, fuel cell plants, small wind energy property, and/or geothermal heat pumps.

To receive this credit, fill out Form 5695 on your annual tax return. This IRS site has more information if you are interested in learning more.

Business Energy Investment Tax Credit

For business owners looking to take advantage of renewable energy opportunities for their businesses, the Business Energy Investment Tax Credit offers a 30% credit for solar, wind, fuel cell, or geothermal energy applicable to businesses in commercial, industrial, agricultural, and/or utility sectors. A potential project may have a credit limit depending on the particular technology (fuel cell, microturbine, etc.) being used, and there may also be system size requirements and energy efficiency criteria also to be met. However, the credit is most generous with solar, for which there is no maximum credit.

To receive this credit, fill out Form 3468 on your tax returns. This IRS site has more information if you are interested in learning more.

Plug-in Electric Drive Motor Vehicle Credit

Individuals interested in purchasing an electric motor vehicle may be able to take advantage of the Plug-in Electric Drive Motor Vehicle Credit, which offers a $2,500-$7,500 credit for the purchase of a “qualified” electric vehicle. A “qualified” vehicle may include plug-in electric drive motor vehicles such as cars and light trucks, as well as certain two- or three-wheeled plug-in electric vehicles.

Two factors are crucial in determining the amount of the credit you can receive. First, the more battery capacity, the greater the credit. The credit starts at $2,500 for a vehicle which uses a battery for propulsion energy and has at least 5 kilowatt hours of capacity. The credit increases by $417 for each additional kilowatt hour of battery capacity beyond 5 kilowatt hours (up to the $7,500 limit). Second, the credit for a certain manufacturer’s electric vehicle starts to phase out once that manufacturer has sold at least 200,000 qualifying units. Be sure to check if a particular brand you are interested in has phased out of the credit already before making a purchase.

To receive this credit, fill out Form 8936 on your annual tax return. This IRS site has more information if you are interested in learning more.

Conclusion

As you can see, there are several programs many people don’t know about that you may be able to take advantage of for your home energy project. These programs are just some of the various energy incentives offered by the federal government. In addition to other federal programs, different state or local incentives may exist in your area as well, so be sure to research whether any such programs may help you finance your project. Also, keep in mind that these programs change over time depending on what Congress or the IRS decide, so always check with the relevant tax advisor to make sure this is the best fit for you.

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