#energycredits

When considering making energy-saving home improvements, it may be helpful to have a home energy audit done. A home energy audit is an inspection and written report for a dwelling located in the United States. Fortunately, there is a federal income tax credit available equal to 30% of the amount paid for home energy audits, up to $150 per tax year. There are also credits available for many other energy-saving expenditures. The IRS has now provided some guidance on what is required to claim the credit for a home energy audit.

Background

The credit for home energy audits is part of the energy efficient home improvement credit, which allows up to 30% of the sum of amounts paid for certain qualified expenditures. There are a couple of aggregate dollar limits for certain categories of expenses as well as specific dollar limits for certain types of costs. An annual $1,200 aggregate credit limit applies to all building envelope components, energy property, and home energy audits. Building envelope components include exterior doors, windows, skylights, and insulation or air sealing materials or systems. Energy property includes certain central air conditioners, water heaters, furnaces, and hot water boilers. A separate annual $2,000 aggregate credit limit applies to electric or natural gas heat pump water heaters; electric or natural gas heat pumps; and biomass stoves and boilers.

There is also a residential clean energy property credit available for 30% of expenditures (with no overall dollar limit) for solar panels, solar water heaters, fuel cell property, wind turbines, geothermal heat pump property, and battery storage technology.

Here is a credit comparison chart for reference.

Home Energy Audit Tax Credit

As noted, the credit for home energy audits is limited to 30% of the cost of a home energy audit, up to $150 per year (30% of $500 would equal $150). It is also subject, along with building envelope components and energy property, to the annual $1,200 aggregate limit for certain items. If you claim the credit, the home energy audit should be kept as part of your tax records.

The home must be owned and used by the taxpayer as a principal residence and the audit must meet certain requirements.

• The audit must identify the most significant and cost-effective energy efficiency improvements, including an estimate of the energy and cost savings for each improvement.
• The inspection must be conducted or supervised by a qualified home energy auditor.*
• The written report must be prepared and signed by a qualified home energy auditor.
• The audit must be consistent with certain Department of Energy and industry guidelines.

The Department of Energy maintains a list of home energy auditor qualified certification programs at energy.gov.

*A home energy auditor is not required to be a qualified home energy auditor for audits conducted before January 1, 2024. For now, the credit can be claimed even if the auditor was not a qualified home energy auditor if the other requirements are met. The home energy audit tax credit cannot be claimed for home energy audits conducted after December 31, 2023, unless the audit is conducted by a qualified home energy auditor.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Starting in 2023, a personal or general business tax credit of up to $7,500 is available for the purchase of new clean vehicles meeting certain requirements (including electric, plug-in hybrid, and fuel cell vehicles). A credit of $3,750 is available if a critical minerals requirement is met, and a credit of $3,750 is available if a battery components requirement is met (for vehicles placed in service from January 1, 2023, through April 17, 2023, the credit allowed generally varied from $3,750 to $7,500 depending on the battery capacity of the vehicle, rather than on these two requirements). Fuel cell vehicles that have final assembly within North America can qualify for the credit without regard to these two requirements.

Proposed regulations (required by the Inflation Reduction Act) have now been published to generally explain the new clean vehicle tax credit and these two battery-related requirements. The two requirements apply to new clean vehicles placed in service after April 17, 2023. The number of vehicles eligible for the credit has dropped considerably now that the proposed regulations have been published.

Vehicle eligibility

Assuming other requirements are met, the amount of the credit will generally be the full $7,500 for new clean vehicles (other than fuel cell vehicles) as long as both the critical minerals and battery components requirements are met ($3,750 if only one of these requirements is met; no credit if neither requirement is met). Qualified fuel cell vehicles are not subject to these two requirements and should qualify for the full $7,500 credit.

The critical minerals requirement is that the percentage of the value of critical minerals contained in the battery that were extracted or processed in the U.S. or in any country with which the U.S. has a free trade agreement in effect, or recycled in North America, is equal to or greater than the applicable percentage. The applicable percentage is 40% for a vehicle placed in service from April 18, 2023, through December 31, 2023, increasing in later years until it reaches 80% after 2026.

The battery components requirement is that the percentage of the value of the components contained in the battery that were manufactured or assembled in North America is equal to or greater than the applicable percentage. The applicable percentage is 50% for a vehicle placed in service from April 18, 2023, through December 31, 2023, increasing in later years until it reaches 100% after 2028.

The credit is not available for vehicles with a manufacturer’s suggested retail price (MSRP) higher than $80,000 for vans, sports utility vehicles, and pickups, or $55,000 for other vehicles. For this purpose, the MSRP is the base retail price suggested by the manufacturer, plus the retail price suggested by the manufacturer for each accessory or item of optional equipment physically attached to the vehicle at the time of delivery to the dealer. It does not include destination charges or optional items added by the dealer, or taxes and fees.

You can check the eligibility of vehicles for the credit at fueleconomy.gov. Final confirmation of vehicle qualification should be done at time of purchase. The seller must provide you with a report about a vehicle’s eligibility at the time of sale.

Purchaser’s income limitation

The credit is generally not available if the purchaser’s modified adjusted gross income (MAGI) for the taxable year or the preceding taxable year (whichever is less) exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). The proposed regulations state that the income limitation does not apply to corporations subject to the corporate income tax. In the case of a partnership or S corporation, the credit is allocated to the partners or shareholders, respectively, and the income limitation is applied to those individuals.

Personal or general business tax credit?

The new clean vehicle tax credit can be either a personal or a general business tax credit, depending on whether the vehicle is used in a trade or business. The proposed regulations provide that if the vehicle is used 50% or more for business, the credit is treated as a general business tax credit; otherwise, the credit is allocated between personal and business use. The credit is nonrefundable if it exceeds your tax liability. An unused general business tax credit can be carried forward to a later year.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

Thanks to the Inflation Reduction Act, the Act provides near-immediate, tangible benefits American families by lowering costs for home energy, new vehicles, health coverage, and prescription drugs. We previously discussed some of the significant provisions in the Act but we wanted to elaborate on what the Inflation Reduction Act means for you as discussed below (not an all-inclusive list).

Healthcare:

• The American Rescue Plan, which Congress passed in March 2021, increased the ACA premium tax credits and expanded eligibility above 400% of the federal poverty level (FPL) for 2021 and 2022. The Inflation Reduction Act extends those expanded subsidies through 2025.

• Caps the amount that seniors will have to pay for prescription drugs they buy at the pharmacy at $2,000 a year.

• Caps the amount that seniors will have to pay for insulin at $35 for a month’s supply.

• Provides access to a number of additional free vaccines, including the shingles vaccine, for Medicare beneficiaries.

• Will further lower prescription drug costs for seniors by allowing Medicare to negotiate the price of high-cost drugs and requiring drug manufacturers to pay Medicare a rebate when they raise prices faster than inflation.

Energy-Related Tax Credits:

• The Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit. The credit will be equal to 30% of the costs of all eligible home improvements made during the year. This is now an annual limit, not a lifetime limit. The maximum tax credit was substantially raised: Cap raised to $1,200 per year for qualifying property on or after January 1, 2023, compared to a lifetime $500 cap previously. Savvy households can spread qualifying home improvement spending over a 10-year period, receiving up to $12,000 back in taxes, compared to $500 previously.

The annual limits for specific types of qualifying improvements will be:

• $150 for home energy audits;
• $250 for any exterior door ($500 total for all exterior doors) that meet applicable Energy Star requirements;
• $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
• $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
• $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This category of improvement is not limited by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
• Roofing will no longer qualify.

• The Residential Energy Efficient Property Credit, now called the Residential Clean Energy Credit, was previously scheduled to expire at the end of 2023 but has been extended through 2034. The Inflation Reduction Act also increased the credit amount, with a phaseout of the applicable percentage (30% between 2023-2032, 26% for 2033, and 22% for 2034). Starting in 2023, the new credit will apply to battery storage technology with a capacity of at least three kilowatt hours.

• Starting in 2023, a tax credit of up to $7,500 is available for the purchase of new clean electric vehicles meeting certain requirements. The credit is not available for vehicles with a manufacturer’s suggested retail price higher than $80,000 for sports utility vehicles and pickups, $55,000 for other vehicles. The credit is not available if the modified adjusted gross income (MAGI) of the purchaser exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). Starting in 2024, an individual can elect to transfer the credit to the dealer as payment for the vehicle.

• Similarly, a tax credit of up to $4,000 is available for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000. The credit is not available if the purchaser’s MAGI exceeds $75,000 ($150,000 for joint filers and surviving spouses, $75,000 for heads of household). An individual can elect to transfer the credit to the dealer as payment for the vehicle.

While these changes may not impact your individual tax bill, please contact us if you want to continue the conversation around tax planning and how these tax credits may save you money at tax time.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.