Breaking the Code: Clean Energy Tax Credits
By: Matthew Floyd, Northeastern Co-op
With changes to the tax law every year, we wanted to keep you up to date on the newest rules and regulations for clean energy tax credits.
Home Energy Tax Credits
The Inflation Reduction Act of 2022 expanded the amounts and types of qualifying expenses for Home Energy Tax Credits. The Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit are available for the year in which qualifying improvements are made.
Any taxpayer who uses a property solely for business-use cannot claim these credits. However, if less than 20% of the property is for business-use the full credit may be available. Business-use of more than 20% is subject to limitation based on the share of expenses allocable to non-business use of the home. Both these credits are nonrefundable which means that your tax liability can be reduced but no additional refund is allowable with no tax liability.
Energy Efficient Home Improvement Credit
You may claim the energy efficient home improvement credit for improvements to your main (primary) home. You can’t claim the credit if you’re a landlord or other property owner. In addition, the home must be located in the United States and be an existing home that you improve, not a new home.
The maximum credit each year is $1,200 for energy property costs and home improvements with limits of $500 on doors, $600 on windows, and $150 on home energy audits. Additionally, $2,000 per year on qualified heat pumps, biomass stoves or biomass boilers with a thermal efficiency rating of at least 75%. Click Here to see a full breakdown of the credits available for certain equipment.
Residential Clean Energy Credit
From 2023 to 2032, this credit is equal to 30% of the costs of new and qualified clean energy property (drops to 26% in 2033 and 22% in 2034). Expenses that qualify for this credit are solar electric panels, water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology. You may be able to claim a credit for certain improvements made to a second home located in the United States that you live in part-time and don't rent to others.
This credit has no limit except for the limitation to fuel cell property. Fuel cells are limited to $500 per half kilowatt of capacity and cannot exceed $1,667 if there are multiple residents of the property.
Solar water heaters must be certified by the Solar Rating Certification Corporation, or a comparable entity endorsed by your resident state. Geothermal heat pumps must meet Energy Star requirements at the time of purchase. Battery storage must have a capacity of at least 3 kilowatt hours.
Credits for New Clean Vehicles
Any taxpayer who purchased a new electric vehicle may be eligible for a tax credit. To qualify, you must buy the vehicle for your own use, not for resale, and use it primarily in the U.S. In addition, to be eligible for a tax credit the Adjusted Gross Income (AGI) of the taxpayer must fall below the following thresholds: $300k for married filing jointly, $225k for Head of Household, and $150k for single or married filing separately. The taxpayer may use their modified AGI from the year in which they take delivery instead of year of purchase of the vehicle if that falls below the applicable threshold.
To qualify for the credit, the vehicle must have a battery capacity of at least 7 kilowatts, have a gross weight rating of less than 14,000 pounds, be made by a qualified manufacturer, undergo final assembly in North America, and for vehicles placed into service after April 17, 2023, meet critical mineral and battery requirements. The vehicle must be purchased new and the seller must report the required information to both the taxpayer and the IRS at the time of sale. Additionally, the MSRP may not exceed $80k for vans, sport utility vehicles, and pickup trucks or $50k for all other vehicles.
For vehicles placed in service between January 1, 2023, and April 17, 2023, the credit is equal to $2,500 plus $417 for each kilowatt of battery capacity beyond 5 and $417 for a vehicle with at least 7 kilowatts of battery capacity (limit of $7,500). For vehicles placed in service after April 17, 2023, the credit is $3,750 for meeting critical mineral requirements and $3,750 for meeting battery requirements for a maximum of $7,500.
Electric Vehicle Charger Credit
Any taxpayer who installs an electric vehicle charger in their primary residence is eligible for a credit equal to 30% of the installation costs up to $1,000.
Child and Dependent Care Credit
The Child and Dependent Care Credit is available to taxpayers who pay expenses to a qualifying individual to enable the taxpayer and their spouse to work or look for work. Expenses are qualified if they are paid for care provided for a dependent under the age of 13 or a spouse / dependent of any age who is incapable of self-care and lives with the taxpayer for more than half the year. The credit is calculated based on income and the percentage of expense the taxpayer incurs (maximum of 50%).
These are just a few of the many tax credits available in 2023. Please reach out with any questions about your personal tax situation.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.