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Top 5 Environmentally Friendly Tax Credits for Individuals

8 minute read

As green energy initiatives become more mainstream, individuals are looking for ways to reduce their environmental footprint.  However, many people who want to reduce their climate footprint may not realize that their environmentally friendly behavior may come with tax advantages! Congress has offered a handful of tax credits that can incentivize taxpayers to make changes to their homes or vehicles that improve and sustain the environment.

Residential Energy Credit

The Residential Energy Efficient Property Credit, or The Nonbusiness Energy Property Credit, is for homeowners who have installed an alternative energy system in their existing or newly constructed home that relies on renewable resources. Renewable resources eligible for the credit include:

  • Qualified solar electric
  • Solar water heating
  • Small wind turbines
  • Geothermal heat pumps
  • Fuel cell properties
  • Biomass fuel properties

You may be able to take a credit of up to 26% of qualified costs for energy efficient systems installed in 2020, 2021 or 2022. Qualified costs include the cost of the system, related labor and piping or wiring costs, reduced by any rebate offered by your utility company.

The tax credit for fuel cells is limited to a maximum of $500 for each half kilowatt of power capacity, but there is no credit limitation for other energy efficient properties.

 While the residential energy property credit is nonrefundable (meaning your tax liability may be reduced to zero but not below zero), any unused portion of the credit can be carried over for use in the following tax year.

A homeowner eligible to claim the credit may do so by completing IRS Form 5695 (Part I). Part II of Form 5695 refers to the Nonbusiness Energy Property Credit, which is discussed next.

The Nonbusiness Energy Property Credit

The Nonbusiness Energy Property Credit is not as bountiful as the Residential Energy Credit, but still offers homeowners up to an additional $500 in tax credits for making energy-efficient home improvements. You may be eligible to take a credit of up to 10% of the purchase price for:

  • Certain types of insulation
  • External windows, doors and skylights designed to reduce heat loss or gain in your home
  • Energy-efficient heating and cooling systems
  • Water heaters
  • Biomass stoves
  • Metal or asphalt roofing materials

When considering these home improvements, be aware the credit is currently limited to an aggregate of $500 in a lifetime.The credit is also capped depending on the type of energy efficient installation. For example, only $200 can be claimed for windows, $150 for furnaces and hot water boilers and $50 for air-circulating fans.

The Nonbusiness Energy Property Credit is nonrefundable.

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Qualified Plug-In Electric Drive Motor Vehicle Credit

The Qualified Plug-In Electric Drive Motor Vehicle Credit applies to plug-in hybrid vehicles (PHEV) and plug-in electric vehicles (EV or PEV). This nonrefundable credit can generate up to $7,500 in tax savings per vehicle. The credit may also apply to two-wheeled PEVs but is limited to 10% of the cost, or a maximum credit of $2,5000.

The current credit applies in the year of purchase only if you are the original owner. Used or leased EVs are not eligible for credit, though many dealerships may give incentives to leasees of EVs.

Not all EVs are created equal when applying for the Qualified Plug-In Electric Drive Motor Vehicle Credit. The credit can range between $2,5000 and $7,500 depending on the energy drawn from the battery. Additionally, when the manufacturer has sold 200,000 qualifying vehicles, the credit will phase out until it is no longer available. For a full listing of vehicles acknowledged by the IRS for eligibility and their credit limits, visit the IRS Index to Manufacturers.

Pending legislation could increase the EV credit to up to $12,500 if it is passed the EV credit has the potential to increase up to $12,5000.

Alternative Motor Vehicle Tax Credit (AKA Fuel Cell Motor Vehicle Tax Credit)

A qualified fuel cell electric vehicle (FCEV) is a vehicle with at least four wheels that is propelled by converting chemical energy directly into electricity. While not as common as the plug-in electric vehicle, purchasing a new FCEV (such as the Hyundai NEXO or Toyota Mirai II) may save you up to $8,000 in tax.

The Fuel Cell Motor Vehicle Tax Credit is based on vehicle weight, fuel economy and when the vehicle was placed in service. To substantiate the allowable credit , a copy of the IRS letter acknowledging certification can be provided to you by the manufacturer.

If a vehicle qualifies for the EV credit (calculated on Form 8936) , the vehicle does not qualify for the FCEV credit, (calculated on Form 8910.) Certain ownership rules apply to claim the credit.

Solar Tax Credit (AKA Investment Tax Credit)

Installing residential solar panels (which are also known as solar photovoltaics (PV) systems) can generate a credit at the federal level through the Investment Tax Credit, (calculated on Form 5695), and may also have an added bonus at your state and/or local level. The current federal incentive provides for a 26% tax credit on the cost of PV systems installed for the first time between 2020 and 2022 and 22% for systems installed in 2023. Unless renewed through an extension of clean energy policy, the tax credit will expire in 2024.

The costs applicable to the tax credit calculation include :

  • The solar PV panels
  • Onsite labor costs for onsite preparation, assembly or installation
  • Permit fees, inspection costs and developer fees
  • Balance-of-system equipment like wiring and inverters
  • Energy storage devices charged by the PV system
  • Sales tax on eligible expenses

A rebate offered by your utility company will reduce total costs used in the solar investment tax credit calculation, but generally rebate incentives offered by your state will not reduce the federal credit.

When determining eligibility, consider that you must use the PV system on your primary or secondary home or at an off-site community solar project. For more information on off-site community solar projects, visit Energy.gov.

Tax Planning for the Environment and Your Pocket

Tax credits provide a dollar-for-dollar reduction of an individual’s tax liability. Taking advantage of sustainable tax credits can be a critical savings strategy — both for taxes and the environment.

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