It’s a great time to go green—you get a dollar for dollar reduction in taxes and the money is taken off your gross income. For example, a 30 percent credit for an expenditure of $1,000 would result in a tax reduction of $300.
Bryan Clayton took advantage of a tax credit for his new home in Murfreesboro, Tenn. by installing a geothermal heating and air conditioning unit. These systems use water pumps from the ground as a medium for heating and cooling rather than air. They run about 80 percent more efficiently than a typical air-to-air HVAC system. The only drawback was the cost—twice as much as a standard air-to-air system. “This would have been out of my price range, but by taking advantage of the tax credit, the entire system was a tax write off,” says Clayton. “The geothermal unit cost $60,000, which gave me the entire $60,000 write off on my taxes, plus it saves me about 40 percent on my monthly utility bill. I’m usually not a big proponent of tax incentives, but in this case it made sense for me, the government and the environment.”
Tom Kimbis, Vice President of Executive Affairs of Solar Energy Industries Association (SEIA) in Washington, DC, had solar deployed at his all-electric home in Travilah, Md. It lowered his electric bill by 40 percent. His pay back will take about five years, but after that, the savings from his power bills will have paid for the initial cost of the system.
The actual cost savings these tax credits depends on your utility rates, where you live, existing state or local incentives, and when you had it installed. Solar costs have decreased more than 70 percent since 2010, so most Americans can save by choosing solar. Tax credits for solar improvements are available through 2020. If you haven’t yet made the improvements, you still have time to do so. Leasing also allows you to go solar with a third party owning the system. The third parties claim the tax credit and can pass those savings to you through lower prices.
Solar isn’t the only tax write off. You can get federal tax credits for energy efficient heating and air condition systems, energy efficient exterior windows, doors, skylights, roofs and roofing products, water heaters, insulation, biomass stoves and more. These products must meet or exceed EnergyStar requirements, a program that helps consumers identify energy efficiency products, homes and buildings. Biomass stoves must have a thermal efficiency rating of at least 75 percent. You can claim 10 percent of your purchase up to $500 for a savings on your federal income tax return.
Another purchase that offers a credit is the addition of a residential fuel cell and microturbine system, according to David Hryck, a New York City tax lawyer and personal finance expert. Through this credit, you can gain access of up $500 per 0.5 kilowatt of power. This credit can apply to either newly constructed homes or existing homes, but it must be your primary residence.
All-electric vehicles can also qualify for tax breaks. “I recommend that anyone who thinks they may qualify should check the fuel economy website and look up your make and model,” says Hryck. “Depending on the vehicle’s battery capacity, you could be in line for a credit north of a few thousand dollars.”
Several states offer tax savings for energy efficient improvements. A state credit that is gaining in popularity is for wind turbines. “If you live in a windy area, you can install a small turbine to generate electricity for your home,” he says. The tax credit is worth 30 percent the cost of the parts, labor and installation. It can also affect businesses that install wind turbines on their property. Because the rules vary by state, be sure to check at the state level for such incentives.
“If you made energy-efficient improvements to your home in 2016, you’re in luck,” says Brian Ashcraft, Director of Compliance at Liberty Tax Service. “It expires with the 2016 tax year, so make sure you bring receipts to your tax preparer this year to claim your credit.”
To learn more about different credits, the IRS website lists each one and provides additional details regarding whether you qualify and how you can apply for each credit.
To apply for the federal tax credits, your tax preparer will need to complete Form 5695 Residential energy Credits. Calculations from that form are then transferred to the Form 1040 or the Form 1040NR.”
Jacob Oksman, a tax attorney with Fox Rothschild LLP in New York City, offers his insights regarding tax credits:
Non-Business Energy Property Credits
IRC (the Internal Revenue Code of 1986, as amended) section 25C provides a credit worth 10 percent of the cost of certain qualified energy efficiency improvements that individuals add to their main home before January 1, 2017. The energy improvement items include insulation, windows, doors and roofs. The credit has a lifetime limit of $500 with only $200 of the limit applicable to windows.
You may also be able to claim credit for the actual cost of residential energy property expenditures. These expenditures include items like water heaters and heating and air conditioning systems. Each type of property has a different dollar limit.
In order to claim the credit, you need written certification from the manufacturer that their product qualifies for this tax credit (usually included with the product’s packaging). This credit expired at the end of 2016, but individuals may still claim the credit on their 2016 tax returns if they didn’t reach their lifetime limit in prior years.
Residential Energy Efficient Property Credits
IRC section 25D provides a credit worth 30 percent of the cost of alternative energy equipment you install in your home with no dollar limit on the credit for most types of property. The residential energy efficient property items include solar hot water heaters, solar electric equipment, and wind turbines. The credit expired December 31, 2016, but solar electric property and solar water heating property expires December 31, 2021.
Unfortunately, since residential energy efficient property items—including solar hot water heaters, solar electric equipment and wind turbines—expired at the end of 2016, that means that it applies to property installed up to the end of 2016, so taxpayers can use it for their 2016 returns due in April. Sometimes provisions of the code are extended at the end of the year and apply retroactively. For example, a budget may pass in November, 2017 that includes an extension of this credit making it applicable for 2017 purchases.
For more information on both credits, refer to this guide.
There are a myriad of business tax credits that encourage businesses to produce or invest in renewable energy, including the production tax credit and the investment tax credit.
Credit for Electricity Produced from Renewable Resources
IRC section 45 provides a credit to businesses for producing and selling electricity from renewable resources during the first 10 years of production. Such energy resources include wind, closed-loop biomass, geothermal energy, solar energy, municipal solid waste, hydropower and marine, and hydrokinetic renewable energy. Generally, the energy must be produced and sold before January 1, 2017 (before January 1, 2020 for wind). The credit generally equals 1.5 cents (adjusted by an inflation factor) multiplied by the kilowatt hours of renewable energy produced and sold by the business.
Credit for Investment in Renewable Energy
IRC section 48 provides a credit to businesses equal to 30 percent (10 percent in some cases) of the cost of energy property placed in service during a taxable year. Energy property includes property that generates electricity from wind, solar energy, geothermal deposits, or microturbines.
Energy Efficient Commercial Building Property Deductions
IRC section 179D provides a deduction for the owners of commercial buildings for the costs of energy efficient property installed as part of a commercial building’s interior lighting, heating, cooling, ventilation, and hot water systems, or building envelope and placed in service before January 1, 2017. The energy efficient property must be certified as being installed as part of a plan designed to reduce the total annual energy and power costs for the interior lighting, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a “reference building.”