If you didn’t know (and many people don’t), a tax credit is more valuable than a tax deduction. A tax credit is a dollar-for-dollar reduction in the taxes you will owe in a year. In contrast, a tax deduction will likely only save you pennies on the dollar. A tax deduction for the highest earners in California will save you around 50 cents on the dollar when combining federal and state income taxes.
President Biden’s Inflation Reduction Act expands three tax credits that you may be able to use to reduce your income taxes. These valuable tax credits encourage taxpayers to make their homes more energy efficient or utilize an electric vehicle (EV).
The Inflation Reduction Act created a new 2023 Energy Efficient Home Improvement Tax Credit, which can help you pay for energy-efficient home improvements. This credit includes, but is not limited to, installing or buying energy-efficient windows, skylights, doors, home insulation, heat pumps, central air conditioners, energy-efficient water heaters, and even a new furnace. The credit can also be applied to upgrades to your energy panel.
The new tax law gives you a credit of up to $1,200 per year for approved home efficiency improvements. So, to maximize the benefits of this tax credit, you may want to spread out some of these improvements over a few tax years.
As a financial planner would loves saving money, I’d also like to point out that many home improvements will save you money on utility bills. Others may also help increase the underlying value of your home.
2. Residential Clean Energy Tax Credit
You may have heard about the tax benefits of installing solar panels on your home. Most taxpayers can already benefit from installing solar via the Residential Clean Energy Tax Credit.
As a tax-planning financial planner, I was excited to see that President Biden’s new law extends this tax credit through 2034. Furthermore, the tax credit for installing solar has jumped from 26% to 30% for eligible solar panels placed into service from this year through 2032.
While there may be a limit to how many solar panels you can squeeze onto your roof, there is no cap on the benefits of the Residential Clean Energy Tax Credit. So, if you were to be quoted $30,000 to install solar panels on your home, you could receive a $9,000 tax credit.
Depending on where you live and the efficiency of your solar panels, many solar panel systems will pay for themselves, via energy savings, in 6-8 years. Your installer can give you a better estimate of this based on your local utility cost, usage, and the cost of your solar panel system.
If you want to further maximize your tax credits, you can also get a tax credit for storage batteries, solar water heaters, and residential fuel cells.
As I mentioned earlier, I’m a Tesla driver who had to spend a lot of money installing a home charger. I’m also planning on staying in California, which has mandated all new cars sold in the state be electric by 2035. With this in mind, I will likely get a lot of use out of my EV charger.
Unlike the solar tax credit, there is a cap on the tax credit for installing a home electric car charger. This non-refundable tax credit will reimburse you for 30% of the money spent installing an electric charger up to $1,000. If you can, try to install that EV charger before this year’s end. The credit will only be available for homeowners who live in low-income or rural areas starting in 2023.
Talk with your tax-planning financial advisor or tax professional to see how you could benefit from these tax credits.