Many Americans have woven green practices into their everyday lives — from recycling to going paperless and even cutting back on meat consumption.
Switching to clean energy or purchasing an electric vehicle are additional ways to go green, but large-scale upgrades also often come with major price tags. Several existing tax credits can help to offset the cost of the commitment — but it pays to know the details.
Whether you’re looking to make some upgrades this year or are wondering if any changes you made in 2021 count toward a tax discount, here’s a quick-start guide to the current federal tax incentives for energy efficiency and other green upgrades.
Plug-in electric car credit
Upgrading to an electric vehicle comes with a few feel-good benefits. Apart from lowering your carbon footprint, electric vehicles often require less maintenance and cost less to fuel than their gas-powered counterparts.
Your purchase might even count toward a federal tax credit of up to $7,500. The catch? You’ll need to keep an eye on which vehicles qualify and for how much.
“What you’ll find is that high-performing fully electric vehicles get the full benefit of the credit,” says Shannon Christensen, an attorney and editor for Thomson Reuters Tax and Accounting based in Lindstrom, Minnesota.
Hybrid models, on the other hand, often qualify for a smaller sum.
Here’s a glance at some of the fine print:
- The credit is worth $2,500 to $7,500, depending on the car’s battery capacity.
- Credits are reduced and eventually phase out after a manufacturer sells 200,000 qualifying vehicles.
- You must own the car. Used or leased cars don’t qualify.
- The car must weigh less than 14,000 pounds.
- The credit is nonrefundable; it can lower your tax bill to zero, but it won’t result in a refund.
Don’t forget to look for additional incentives on the state and local level, says Gena Jones, an attorney and certified public accountant based in Flossmoor, Illinois. California’s Clean Air Vehicle program, for example, grants carpool lane access to select electric vehicles. New Yorkers, on the other hand, might be eligible for a state-level rebate of up to $2,000 on top of the federal tax credit.
» Interested in building a more ethical portfolio? Consider ESG investing.
Residential energy credits
Green tax credits for the home come in two buckets: one for renewable energy systems and another for energy efficiency.
Taxpayers who upgrade to renewable energy systems for their homes, such as solar panels or geothermal heat pumps, may be eligible for a nonrefundable tax credit of up to 26% of the costs for systems installed in 2020 through 2022. After that, the percentage goes down to 22% for systems installed in 2023.
Switching to an alternative energy system could also help you save on utilities and even increase the value of your home.
But note that certain subsidies — like, say, a kickback check you receive from a utility company — should be included as income when you file your return, says Christensen. Otherwise, you’ll need to subtract the check amount from the total costs you’re claiming before you calculate your credit.
If you’re wondering about smaller commitment changes, the IRS also offers some relief there. Adding insulation or upgrading to energy-efficient doors or windows in your home might make you eligible for a nonrefundable tax credit of up to $500. The caveat? This credit hasn’t been renewed for 2022, so only qualifying upgrades in 2021 count at this point.
» Need help choosing the right software? Explore the best tax preparation services.
Before you file
If you think you’re eligible for a federal tax incentive this year, make sure you provide your tax preparer with all the necessary receipts and certificates to redeem the credit you’re eyeing, says Jones. If you’re missing any of the paperwork, you might jeopardize your chances of qualifying.
And if you’re not quite ready to commit to an electric vehicle or solar paneling, make sure to keep an eye on the fate of President Biden’s Build Back Better Act in the coming months. Although it’s currently stalled in Congress, the bill has several ambitious plans in place for clean energy, including generous expansions and enhancements of the existing credits above.
This article was written by NerdWallet and was originally published by The Associated Press.
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