Did you know you can unlock significant savings while helping the environment? Climate tax breaks represent a crucial tool in the arsenal against climate change, offering financial incentives to drive environmentally responsible behavior and investments in clean and efficient energy products. Helping to advance participation in green innovation and sustainability, these incentives allow us to be proactive in moving towards a more resilient and low-carbon economy.
The Inflation Reduction Act of 2022 provides credits and rebates to promote consumer spending and investments in electric vehicles, home-efficiency upgrades, and energy-efficient appliances. The tax breaks are in place until at least 2032, so even if you aren’t in the market right now for a vehicle or making home improvements soon, keep them in mind for the near future. Each tax saving opportunity is a chance to support advancements in renewable energy and energy efficiency.
How do the credits and rebates work?
Most of the incentives in the act are tax credits, meaning that the benefit is received when filing a return and tax is due, and taxpayers don’t receive cash back for the credit. If you install solar panels, for example, you’ll be eligible for a “residential clean energy credit” of up to 30% that you can take when you file your taxes for the year they were installed. This credit extends to the installation of other energy efficiencies, such as wind or geothermal equipment. Keep in mind, though, that you can’t get back more with credits than you owe in taxes. If you owed, say, $3,000 in federal income tax in 2023, that’s the most you could receive in credit, even if 30% of the solar project was more than $3,000. The remaining credit will be carried forward to offset future tax year(s).
How much can consumers potentially save? While there are limits to the various credits, in totality, consumers could benefit from tax savings if they implement energy-efficient home improvements as well as buy qualifying electric vehicles for their own use.
New electric vehicles
For new electric vehicles (EVs), the tax credit of up to $7,500 is available until 2032. As of the beginning of 2024, credits must be initiated and approved at the time of the sale. A cash credit can be applied by the dealership at the time of purchase, or buyers can claim the credit when filing their federal tax return. The current EV program has additional layers of restriction:
- Manufacturing requirements: Final assembly of the new car must occur in North America. Consumers can receive a $3,750 credit for an EV that was assembled in North America, including its battery components. Another $3,750 credit is available if minerals in the battery were mined in countries that have a free-trade agreement with the United States.
- Income requirements: Single and married-filing-separate filers qualify for a tax credit on a new EV purchase if their adjusted gross income (AGI) is less than $150,000, $225,000 for heads of household, or $300,000 for married couples filing jointly.
- Vehicle pricing: To qualify for the credit, the car’s MSRP must not cost more than $55,000 (or $80,000 for an SUV, truck, or van).
Used electric vehicles
For used EVs, there’s a $4,000 credit that applies to up to 30% of the sale price. Unlike new EVs, there are no made-in-America requirements for used EVs. However, some other restrictions apply:
- Car model year: Car must be at least two years old.
- First sale: Credit applies only if it’s the first sale, meaning the seller purchased the car new through a dealer.
- Income requirements: Single and married-filing-separate filers can qualify if AGI is less than $75,000. $112,5000 for head of household, or $150,000 for married couples filing jointly.
- Vehicle pricing: Price must not exceed $25,000.
- Gross vehicle weight rating (GVWR): Have a rating of less than 14,000 pounds.
Information on new and used EVs that qualify for tax credits can be found at fueleconomy.gov.
Home energy improvements
The “energy efficient home improvement credit” offers up to $14,000 for appliance and non-appliance upgrades, and up to $8,000 for efficiency upgrades in areas such as HVAC and insulation, covering up to 50% of a project. Energy-efficient appliances include induction stoves, clothes dryers, and air conditioners. Income restrictions apply and you may need to document the cost of an energy improvement for your state income tax to receive a rebate. There are various dollar caps based on each project, so check with your local energy utility for specifics.
Homeowners can receive a tax credit for the installation of solar panels or other clean-energy improvements. The credit is up to 30% for solar panels. Homeowners can also get up to $3,200 in tax credit for improvements in energy efficiency, such as exterior doors, skylights, exterior windows, and water heaters. Most home-improvement credits apply in the year a project is completed, are nonrefundable, and some cannot be applied to future tax years.
Taking advantage of savings
You may need to have a lot of patience and detailed planning to get the benefits of these tax credits and rebates because there are significant restrictions and limitations that apply in different areas. As always, if you face an uncertain situation and need guidance, reach out to your wealth advisor or tax professional.
If you’re not yet a Mercer Advisors client and want to know more about how tax credits and rebates can potentially save you money or fit into a comprehensive wealth management plan, let’s talk.
Source: IRS.gov
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