You don’t have to be a die-hard environmentalist to see the benefit of adding renewable energy to your home. What stops homeowners from installing these money-saving features is often the up-front cost or a lack of awareness of how going solar can help you tax-wise. However, an energy tax credit can indeed help take the sting out of that initial investment.
Consider working with a financial advisor as you look to reduce your taxes as well as your carbon footprint.
Tax Credits vs. Tax Deductions
First, let’s review the difference between a tax deduction and a tax credit. A tax deduction reduces your income for tax purposes, while a tax credit directly reduces your tax bill. That’s why credits feel a whole lot more satisfying.
Tax credits are available for qualified improvements that will reduce your energy use, whether that’s installing something new (like a geothermal heating system) or updating something you already have (like your boiler).
Federal Energy Tax Credits
In mid-2022 the Inflation Reduction Act became law, extending and expanding various tax benefits that encourage people to use less energy. Under provisions of this new law taxpayers can get a maximum rebate of $14,000 to buy heat pumps and other energy-efficient appliances. The White House estimates this will save families at least $350 annually.
The law also includes a credit to lower energy costs (the nonprofit Resources for the Future says households could save up to $220 annually in electricity costs), and more than 7 million families could qualify for a 30% tax credit that would save $9,000 over the life of the system (or at least $300 annually).
The law also offers tax rebates up to $7,500 for the purchase of a new clean energy vehicle ($4,000 for a used one).
Tips for Claiming Energy Tax Credits
Here are some of the most important things to know about claiming energy tax credits and rebates:
1. Know Your Limits
Don’t commit to improvements you can’t afford just because you’re chasing a big energy tax credit. And if you’ve never picked up a hammer before, you probably shouldn’t try to DIY your entire solar panel installation. Once you’re aware of your limitations in the realms of money and experience, get to know the limits on your tax savings, too. Take a look at IRS Form 5695 and energystar.gov for the nitty gritty. (You want to avoid shelling out thousands only to find out that the improvements you made don’t qualify for tax savings.)
2. Get It in Writing
Make sure you’re documenting the improvements you make to your property so you can provide the IRS (or your accountant) with proof that you’ve earned your energy tax credits. This is good practice in general, but it’s also important because the energy tax credit is calculated as a percentage of what you spent. For certain improvements you can get a credit for up to 10% of your costs, and with others it’s up to 30%. Save those receipts.
3. Think Local (and State and Federal)
We’ve been talking federal taxes up to now, but many states also offer tax breaks for people who make their homes more energy-efficient. You know that house with the awesome wind turbine you pass on your way to work? Why not ring the doorbell and see if the owner is willing to let you pick her brain?
There are plenty of tutorials and blogs on green home improvement, but it’s valuable to get a local perspective if you can. Someone local can recommend contractors in your area and might have advice on local and state programs that saved her money – and could do the same for you.
Bottom Line
The federal government is offering specific incentives to home owners to reduce their energy consumption, particularly as it concerns their residences. One key way they do that is with tax credits. Taking advantage of them can reduce your utility bills and also get you tax benefits.
Tax Tips
- It’s easy to miss tax credits and deductions, which is why working with a financial advisor can be so helpful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Be sure to check out our free income tax calculator to get a quick estimate of what you will owe the federal government, as well as our tax return calculator.
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