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What Are Energy Tax Credits?

Updated for Tax Year 2022 • December 5, 2022 03:23 PM


OVERVIEW

In an attempt to promote a healthier environment, the U.S. Congress authorizes an array of energy tax credits as incentive for people using alternative energy resources. If you are eligible, these tax credits reduce the amount of income tax you owe on a dollar-for-dollar basis. To give that some context, a tax deduction only reduces the amount of income that is subject to tax, so energy tax credits could save you a lot of money.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

Two renewable energy technicians look out over a wind farm as they talk.

Eligibility for energy efficient credits

Installing alternative energy equipment in your home such as solar electric panels and solar water heating, can qualify you for a credit equal to 30% of your total cost. The credit is available through the end of 2032. After that, the percentage steps down and then stops at the end of 2034.

In addition to solar, credits are available for certain qualified home improvements such as energy efficient windows, doors, and insulation among other items.

As a credit, you take the amount directly off your tax payment, rather than as a deduction from your taxable income. Other than the cost of the system, there's no limit to the dollar amount of the credit.

Eligibility for plug-in electric vehicle credits

To minimize the environmental pollution that gasoline-powered vehicles create and to encourage people to by electric vehicles, the federal government offers a tax incentive. The value of the tax credit ranges from $2,500 to $7,500 depending on the battery capacity of the plug-in electric vehicle.

To qualify for the credit, the vehicle has to have at least four wheels, weigh less than 14,000 pounds and draw propulsion using a battery with capacity of at least five kilowatt hours. The vehicle also has to be rechargeable using an external electricity source.

The full amount of the credit will phase out after the manufacturer has sold at least 200,000 vehicles. This credit is available for vehicles purchased through August 16, 2022.

Beginning after August 16, 2022 the credit for vehicles is significantly changed and is renamed the Clean Vehicle Credit. For the remainder of 2022, the vehicle credit has a requirement for final assembly in North America in addition to the quantity limit mentioned above.

The new credit includes not only new vehicles like the former credit but adds up to $4,000 for used electric vehicles in addition to credits for certain qualified fuel cell vehicles. The credit for plug-in hybrid vehicles will see the qualifications increase such that they must have at least 7kWh battery packs to qualify.

Beginning in 2023 the rules change again. The rules limiting the quantity sold by the manufacturer go away but the requirement to be made in North America stays. Also, the credit is only available if the battery components are manufactured in certain countries.

Additionally, half of the credit is based on the requirement that the percentage of battery components are made or assembled in North America has to exceed a certain percentage that increases each year beginning with at least 40% before 2024 all the way up to at least 80% after 2026.

The second half of the credit is based on when the battery materials come from. After 2024 the critical materials have to come from certain companies and a certain percentage must come from North America. These percentages ramp up of the years the same way that the battery component percentage requirements increase.

Beginning in 2023, there is an added cap on the sticker price of the vehicle: $55,000 for most cars and $80,000 for new battery electric SUVs, pickups and vans. Additionally, your adjusted gross income has to be below $150,000 for single filers, $225,000 for heads of households, and $300,000 for joint filers.

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