Energy Credit Incentives for Individuals
The below information regarding home energy credits was taken directly from the IRS website. I was reluctant to pull the same information from a contractor’s website. Not always, but sometimes, they are a bit over-zealous in their interpretation of the tax law when it comes to business. Buyer beware!
Please remember that a tax credit typically reduces your income taxes dollar for dollar. A tax deduction reduces your taxable income. Your federal income tax is based upon your taxable income. So, all things being the same a federal credit is typically worth more than a federal tax deduction.
If you are considering some home energy improvements of some sort, please be sure to do your homework on whether they may qualify. Also, please pay particular attention to the expiration dates below for different types of home energy improvements.
-Mark Bradstreet
Q. Are there incentives for making your home energy efficient by installing alternative energy equipment?
A. Yes, the residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:
- In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
- In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
- In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.
Q. Is a roof eligible for the residential energy efficient property tax credit?
A. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof's decking or rafters that serve only a roofing or structural function do not qualify for the credit.
Q. Does any guidance issued for the energy credit under section 48 of the Internal Revenue Code apply to the residential energy efficient property tax credit under section 25D of the Internal Revenue Code?
A. IRS guidance issued with respect to the energy credit under section 48 in publication items such as Notice 2018-59, has no applicability to the residential energy efficient property credit under section 25D.
Q. What improvements qualify for the residential energy property credit for homeowners?
A. In 2018, 2019 and 2020, an individual may claim a credit for (1) 10 percent of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year (subject to the overall credit limit of $500).
Qualified energy efficiency improvements include the following qualifying products:
- Energy-efficient exterior windows, doors and skylights
- Roofs (metal and asphalt) and roof products
- Insulation
Residential energy property expenditures include the following qualifying products:
- Energy-efficient heating and air conditioning systems
- Water heaters (natural gas, propane or oil)
- Biomass stoves
Please note that qualifying property must meet the applicable standards in the law.
The residential energy property credit, which expired at the end of December 2014, was extended for two years through December 2016 by the Protecting Americans from Tax Hikes Act of 2015. The Consolidated Appropriations Act, 2018 extended the credit through December 2017. The nonbusiness energy property credit expired on December 31, 2017 but was retroactively extended for tax years 2018, 2019 and 2020 on December 20, 2019 as part of the Further Consolidated Appropriations Act. The credit had previously been extended by legislation several times. See Notice 2013-70 PDF for more information on this credit as well as the credit for alternative energy equipment.
Q. Who qualifies to claim a residential energy property credit? Are there limitations?
A. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019 and 2020, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:
- $50 for any advanced main air circulating fan
- $150 for any qualified natural gas, propane, or oil furnace or hot water boiler
- $300 for any item of energy-efficient building property
The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.
Published on the IRS Website – October 2020
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
This Week’s Author, Mark Bradstreet, CPA
–until next week.