Jason’s Financial Favorites: Tax Credits for Green Energy Purchases
The U.S. tax code has a way of discouraging certain things and encouraging others. One obvious example of this would be discouraging filing your tax return late by penalizing you for doing so. Another would be encouraging you to save by allowing a deduction for contributions to certain accounts, like a traditional IRA or an HSA. When a provision in the tax code really wants you to do something, the stakes get raised. Think a 50% penalty tax for missing a required minimum distribution or any one of a number of dollar-for-dollar offsets in tax liability (aka credits) available for making certain investments or purchases.
It’s the latter that provides the encouragement and flat out incentive to act when you otherwise would not — or would be far less likely to — act. So if you’re reading this sometime within three years of when I wrote it, I can assure you that, as of right now, the federal and/or Colorado state governments really want you to install solar (or other renewable energy) on all of the real estate in which you live. They also want you to purchase all-electric or plug-in hybrid vehicles. How do I know? Because both tax codes are offering significant tax credits for you to do so. Read on to learn the high-level info and where you can go for the details.
Going solar (or wind, or geothermal)
The federal Residential Energy Efficient Property Credit (see 26 U.S. Code § 25D) has been around for several years. It offers a substantial financial incentive to install certain solar, fuel cell, wind, and geothermal energy-producing property in or on your home. For most — especially in ever-sunny Colorado — solar is the most likely property to install and use to claim this credit. There is a similar credit for commercial entities (see 26 U.S. Code § 48), but it is beyond the scope of this post.
If you’ve heard or read anything about the credit, you may have become aware of it simply because of the fact that it will begin to sunset in 2020. And it will be unavailable in its entirety in the 2022 tax year and beyond. While the credit is sunsetting, it’s also fairly mild in its reduction for the next couple of tax years before falling off of a cliff in 2022 when it goes to zero.
If you haven’t installed qualifying property already — and you know of an installer who’s ready to take on the project and can get it done and installed before the end of the year — you’re still able to claim the full credit for the 2019 tax year. If not, don’t worry: You’re still going to get a really decent credit in 2020 and even 2021. In short, you will receive the following percentages of the total cost of equipment and installation as a federal tax credit in the tax year that you place the qualifying property into service. (Note that it’s not the year you pay but the year you have the property installed and turned on that matters.)
30% for property placed into service in the 2019 calendar year
26% for property placed into service in the 2020 calendar year
22% for property placed into service in the 2021 calendar year
Keep in mind that this specific credit is only available for residential real estate that you occupy and use as a home. It includes a second or vacation home, except for fuel cell property, which must be in your main home. The credit is not available for real estate that you rent out or hold for investment. If you use a property as both a home and a rental, you can prorate the credit accordingly. And while the credit is non-refundable, meaning that you can only use it to bring your tax liability to $0, you can carry the credit forward until you can utilize it in a future year.
Finally, research any state or local tax incentives or rebates. While Colorado does not have a state income tax incentive for installing any qualifying property, the City of Fort Collins has offered rebates of up to $1,500 for solar installations in Fort Collins. For more information on the federal credit, check out the IRS information and instructions for Form 5695.
In Colorado, at least, the biggest incentive for purchasing an all-electric or a plug-in hybrid vehicle is the state’s Innovative Motor Vehicle Credit. This is a refundable credit for purchasing a qualifying passenger vehicle or truck. Because the credit is refundable, you can receive money back even if your income tax liability to the state is $0.
In 2019, the credit is $5,000 for passenger vehicles and, similar to the federal Residential Energy Efficient Property Credit, it will be sunsetting and gone in the 2022 tax year. For passenger vehicles, the state will reduce the credit as follows:
$5,000 for vehicles purchased in the 2019 calendar year
$4,000 for vehicles purchased in the 2020 calendar year
$2,500 for vehicles purchased in the 2021 calendar year
Leased vehicles qualify for half of the credit that purchased vehicles do. Also, light-, medium-, and heavy-duty trucks qualify for higher amounts (the heavier the vehicle, the higher the credit). For the most up-to-date information on the CO Innovative Motor Vehicle Credit, check out Income Tax FYI 69.
Most importantly, keep in mind that hybrid passenger vehicles only qualify if they are plug-in hybrids. This means that the vehicle can operate solely with an electric motor with a 4 kWh or greater battery capacity. And that battery must also be capable of recharging from an external power source.
Uncle Sam is also ready to incentivize your purchase of an all-electric or plug-in hybrid vehicle with the Qualified Plug-In Electric Drive Vehicle Credit (see 26 U.S. Code § 30D). This is another non-refundable federal credit of anywhere between $2,500 and $7,500 depending on the size of the vehicle and its battery capacity.
There are a handful of caveats to keep in mind with the federal credit. In addition to being non-refundable, you can’t carry the credit forward to future years. That means you must have a tax liability (before withholdings and payments) of at least the amount of the credit in the tax year you purchase the vehicle in order to realize the full benefit. Also, the credit phases out based on the manufacturer — so popular qualifying vehicles made by Tesla or Chevrolet will receive a reduced maximum credit or no credit at all. Finally, the federal credit is not available at all for leasing a vehicle as the lessor, not the lessee, is entitled to the credit.
To learn more about the Qualified Plug-In Electric Drive Vehicle Credit, check out the Office of Energy Efficiency & Renewable Energy’s information page as well as the dedicated IRS page on the credit. To research which manufacturers have already phased out or are in the process of phasing out eligibility for the credit, visit the EPA’s fueleconomy.gov website.
Whether you’re in the market for a new vehicle, looking for ways to make an investment in cutting or eliminating your electricity bill, or you’re getting green and wanting to cut your carbon footprint … the tax system is ready to help you make it possible. You may want to take advantage while it lasts.
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