If you are like most taxpayers, you probably want to reduce your tax bill this year.
While tax deductions are more commonly used, wise taxpayers also look to tax credits to minimize their tax liability.
In this article, we cover the ins and outs of two tax credits available to eligible taxpayers, especially those who value environmental sustainability: the solar investment tax credit and the electric vehicle tax credit.
What Is the Solar Investment Tax Credit (ITC)?
Solar Photovoltaic (PV) systems provide a home with solar energy, which is an environmentally friendly way to power your home and reduce your electric bill. If you’ve ever seen a home in your neighborhood with solar panels on the roof, this is a common example of a solar PV system.
The solar investment tax credit (ITC) allows people who install a PV system to reduce their federal income tax by a percentage of the cost of the system in the year it was installed.
Through 2032, that percentage is 30% of the cost of the system. For example, if you spent $21,000 on a new solar system for your home, you would be able to claim a tax credit of $6,300. However, this rate is set to decrease and eventually expire in 2035.¹
Taxpayer Eligibility Requirements
To take advantage of the solar tax credit, taxpayers must meet the following criteria²:
- Location: The solar PV system must be located at your primary or secondary residence within the United States. You do not need to be a homeowner if you are contributing to the costs of a solar PV system as a tenant-stockholder or condominium member.
- Date of Installation: Your system must be installed between January 1, 2017 and December 31, 2034.
- Full Ownership: You must own the solar PV system outright or through a financing agreement.
Equipment Eligibility Requirements
While the purpose of the tax credit is to encourage sustainable environmental practices, not every purchase related to solar energy qualifies for the tax credit.
Qualifying expenses include²:
- The cost of solar PV panels or PV solar cells
- On-site labor costs for installation & inspection
- Permit and developer fees
- Equipment for installation and ongoing maintenance
- Some energy storage devices
- Sales taxes on eligible expenses
Additionally, all claimed solar PV equipment must be new or never before used. The solar investment tax credit only applies to first-time installations of original equipment.
To claim the credit, you or your CPA will need to complete and attach IRS Form 5695 to your federal tax return. Instructions to complete the form are available on the IRS website.
What Is the Electric Vehicle (EV) Tax Credit?
The Electric Vehicle (EV) Tax Credit applies to taxpayers who purchased a new or used electric vehicle—though there are a number of eligibility requirements taxpayers must meet to qualify.
New Vehicle Eligibility Requirements
With the Clean Vehicle Tax Credit, eligible new vehicles could qualify for a credit of up to $7,500. However, the exact credit amount varies depending on factors like battery capacity and assembly requirements.
While this tax credit is only available to qualified purchasers under a certain modified gross income level, the vehicle itself must also meet certain standards including³:
- It must be an eligible plug-in electric vehicle or fuel cell vehicle.
- It has to weigh less than 14,000 pounds.
- It has to have at least 7-kilowatt hours of battery capacity.
New vehicles must also be constructed by a qualified manufacturer, assembled in North America, and meet mineral and battery component requirements³.
Additional requirements for new vehicle eligibility are available on the IRS website.
Used Vehicle Eligibility Requirements
Eligible used vehicles may qualify for up to $4,000 in tax credits. In addition to the requirements listed for new vehicles above, qualified used vehicles must also⁴:
- Be at least two years old
- Cost less than $25,000
- Be purchased in or after 2023
As the purchaser of an electric vehicle, you must also meet income limits and prove prior ownership history.⁴ Reference the full list of requirements for used vehicles on the IRS website.
How to Claim the EV Tax Credit
First, determine if your vehicle is eligible for the tax credit by searching the government’s database. If you qualify and wish to claim the EV Tax Credit, you or your CPA will have to file Form 8936 with your tax return.
Legislation around electric vehicles changes regularly, with a recent change allowing car buyers to enjoy their tax credit immediately at the point of sale rather than waiting until tax time. To transfer the credit to your car dealership, you must meet additional requirements and work with your car dealer to take the necessary steps.
Next Steps
If you’re looking for ways to maximize the savings of your recent purchase, tax credits are a great option to look into with your advisor or CPA. Even if your purchase doesn’t qualify for a clean energy tax credit, you may be eligible for other local incentives, rebates, energy buy-back programs, and/or tax exemptions.
Just keep in mind, EV cars and solar panels are costly purchases, and rebates or credits don’t negate the cost completely. If you would like to speak with your advisor to determine how such purchases may impact your other financial goals, book a call today.
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