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Tax Benefits for Investing in Clean Energy

Posted 03/13/2020

Tax season is upon us once more! If you haven’t completed your tax returns yet or if you’re ahead of the game and already thinking about how you can minimize your tax burden for next year, our team wants to ensure that you’re aware of valuable tax credit opportunities for investing in clean energy.

Tax Credit vs Tax Deduction

Before we get into the clean energy tax credits, let’s cover the basics. A tax credit directly reduces the amount of taxes you owe, while a tax deduction indirectly reduces your tax burden.

Let’s say you owe $500 in taxes and you have a $200 tax credit. Applying that credit means you now owe $300.

Now, assume you made $40,000 in taxable income, but you have a tax deduction of $1,000. Your taxable income is now $39,000; your tax burden is indirectly affected because the tax will be a percentage of your income.

Tax Credits for Investing in Clean Energy

Clean energy includes things like solar energy or geothermal systems.

Renewable Energy Tax Credits

Homeowners who invest in solar energy, wind turbines, and/or heat pumps are eligible for tax benefits up to 30% of the system’s cost. 

According to the Bipartisan Budget Act of 2018, homeowners can receive the following credits:

  • 30% of the cost of renewable energy sources that went into service by 12/31/2019
  • 26% of costs of units installed after 12/31/2019 and before 1/1/2021
  • 22% of costs of units installed after 12/31/2020 and before 1/1/2022

Tax Credit Rules

These credits can only be applied to primary residences and second homes, but there is no cap on the credits. The only restriction is that your credits cannot exceed your tax burden, but you can roll over some credits to next year’s taxes.

For all types of renewable energy systems, the energy that they generate must be used in your primary/secondary home. Additionally, your system must meet certain standards to qualify. For example, if you have installed a geothermal heat pump, it must meet Energy Star guidelines to be eligible for the credit.

If you are looking for more tax benefits for improving your home or buying a new one, check out one of our recent posts on the subject. For more information on buying a home in general, feel free to reach out to one of Seabrook’s real estate agents.