Ep. 53 | Understanding Federal Tax Energy Credits
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Speaker 2:Hey, everyone, and welcome back
Speaker 3:to the Teaching Tax Flow podcast. On today, episode 53, we're gonna take a dive into understanding some federal tax energy credits. But before we do that, as always, let's take
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Speaker 2:Great topic we're gonna talk about today. Something that I have a very large personal interest in. Had to force Chris a little bit to do it because there's a lot of detail in it. So before he punches me in the throat Chris, how's it going, man? How are you today?
Speaker 5:It is going well. How are you doing today?
Speaker 2:I'm doing great, man. We're about to talk one of my favorite topics, not just on the tax part, but on everything else. We're gonna talk about home energy tax credits. So what exactly that means, we're gonna dive into a little bit. Obviously, we're gonna talk about the benefits with it.
Speaker 2:There are a lot of details. We're not gonna get too far into the weeds on that. We're gonna give you some links, some resources you can dive into on your own time, whatever you enjoy relaxing. Here, we're gonna add to it to give you something to read. So, Chris, give us give us kind of a kickoff.
Speaker 2:Right? When in the eyes of the IRS, what in the world do they consider as a home energy tax credit? Like, what are
Speaker 5:they enticing us as US based taxpayers to do? Well, first of all, as I said, it's a pleasure to be back. Excited to talk about the subject despite your your thoughts. We're actually both of us are in the middle of some significant home improvements to our primary residences, and, so this is a factor. There have been energy efficient home improvements for a long, long time.
Speaker 5:Typically, they've been extremely limited. But with we we talk about let's take a step back. We talk about one of the three laws of teaching tax flow is that the the tax agencies are your involuntary business partner. The IRS is your biggest business partner. We're gonna talk about these tax credits in from the light of a federal tax credit.
Speaker 5:Different states have different credits and rebates, but this is a federal tax credit discussion. And with the inflation reduction act of 2022, what happened is there was a large expansion of tax credits, of of the available to, people that make improvements to their primary residence. We're gonna define primary residence, which seems very logical, but it can get a little tricky. So, actually, let's just start off with that. Let's start off with what is a primary residence.
Speaker 5:Right? See well, a primary residence, IRS set says, is a a home that that you live in, and so basically your primary residence, your principal residence, or a second residence that is not rented out. So let's say you have a a home in Michigan, about November, you start shivering too much, and you have a home in Florida and you're a snowbird, and you don't rent out that home in Florida, it's not a rental property, it's just a second residence. Could be a cottage, it could could be whatever. Improvements to that residence would be eligible.
Speaker 5:Interesting wrinkle on this as well. Now I don't know how common this would be, but the credits available for non homeowners. So if you're renting a property, let's say you're renting a home, let's say you're gonna know you know, you're gonna be there for ten, fifteen years, and you want to make an energy efficient home improvement, you could be eligible for that credit even without, being the owner of the home.
Speaker 2:Now the landlord to see that lease agreement. Can you imagine what those lease agreements look like? If someone's like, hey. I'm gonna rent you this house, but me as a landlord, I'm not gonna take care of it at all. So that's that's on you, renter.
Speaker 2:But some people. Right? Like, I mean, me me and my wife lived in a home in in Charleston, South Carolina. Right? I mean, this this home was built in the seventeen hundreds.
Speaker 2:So naturally, not I mean, we didn't do energy efficiency improvements, but little stuff we did do ourselves in there. Not that there was anything wrong with it. We just wanted to change it. Right? So not that I've ever seen this from a landlord side of things, but I've never had anybody that read it from us wanna go improve the, insulation, we should say, in the home.
Speaker 2:So that would be interesting.
Speaker 5:Well, it does provide you with some potential tax planning opportunities from the landlord perspective, but let's, so anyway, that's that's what a those are the properties that are eligible. There are two tax credits available. One is is really, sexy for, like, a better term. One is okay. But they both will help you out.
Speaker 5:Now the first one, let's talk about the one that's gonna apply to almost everybody based on that inflation reduction act of 2022 that does home improvements. That one is called the energy efficient home improvement credit. As I said, homeowners that improve their primary residence will have the opportunities to take a credit for 30% of certain qualified expenses, and that is effective January 1 here in 2023, and, it goes on for about ten years. So it's a pretty it's a pretty well, it goes through 2033. So that's so you get a 30% credit for certain qualified expenses.
Speaker 5:Now before we get our feathers ruffled too much and get too excited, there's a limit to this. Alright? The limit per year of credit is $1,200, and then there's certain special improvements that qualify for a separate $2,000 per year maximum. So in general, think about for most people, the limit's gonna be $1,200 credit. So so if you spent $10,000, 30 percent of $10,000 is $3,000.
Speaker 5:Well, you your credit's not 3,000. It's 1,200, assuming you put your money into certain expenditures. So $1,200 max credit for certain energy efficient home improvements, There's a second separate limit for $2,000 for other types of improvements.
Speaker 2:And, actually, Chris, too there, it it gets kind of interesting. Right? So we kind of on a personal side. So my primary residence is in Michigan, so naturally it gets cold. Right?
Speaker 2:Our house was built in the mid eighteen hundreds, not very energy efficient. And a shout out to the one point one, one point two million members of another Facebook group. I believe it's our old house on there. If anybody has an old house, check that one out. You will learn a ton, I promise.
Speaker 2:But why I wanna mention that group is if anybody has an older home specifically, you have to understand exactly what Chris said there. Right? Like, you have maximums. And anybody who's ever done work on an old home realizes that that maximum is never, let's put it, realistically affordable, I think is a way. Right?
Speaker 2:So, yes, you get a credit. However, what would normally be a $1,500 job, say, at a home that was built in the eighties, nineties, '2 thousands, is now a $10.20, $30,000 job on an old home because there's a lot that goes into it. So, Chris, I appreciate you kinda basically chunking out and describing where those maxes line up. But then also, as you mentioned, and I think we talked a little bit before the show as well, is when it comes to planning. Right?
Speaker 2:So don't do everything in one year. Plan it out. If it's not absolutely necessary to do everything in one year, do it over the course of a couple years. So and I know there's there's some identifying or I should say specific, improvements. Right?
Speaker 2:So energy efficiency, how we think, insulation, etcetera, doors, windows.
Speaker 5:Well, the the foot the good part about this is there's no lifetime limit to the energy efficient home improvement credit. You could, in theory, get a $1,200 credit every year for the next eleven years if you had qualifying expenses. Again, we always say don't let the tax tail wag the dog, where the previous credit was maxed out. So let's talk about what meets the requirements. Now the details are gonna be on energy.g0v, but in general, the expenses that are gonna qualify for the energy efficient home improvement credit are exterior doors, windows, skylights, and insulation materials, central air conditioners, water heaters, furnaces, boilers, and heat pumps, biomass stoves and boilers, and home energy audits.
Speaker 5:That's a new one. So that means that if you have someone come out to your property and do an audit of your property to determine if you should even what would what needs work, you can get a credit just for someone out coming up, coming and doing that audit. Now there are so what you have to think about is for those expenses, 30% of those expenses are eligible for a credit. Then we look at, okay, what are some of the limitations? So there's I said there so there's that $1,200 limitation.
Speaker 5:And within that $1,200 credit limitation, there are sublimitations. So for instance, energy efficient air conditioners, efficient heat heating equipment, Those the credit available for those two is up to $600 of the $1,200. Water heating equipment is up another up to $600. Electric panels, circuit upgrades for new electrical equipment, up to $600. Windows, including skylights, up to $600.
Speaker 5:That energy home energy audit, it's 30% of the cost up to a hundred and $50. So if someone came into your house and charged you a thousand dollars for the home energy audit, 30% of that would be available for credit, $300, but the limit for that audit is a hundred and $50. So you just be weary and and I mean, this is very generous because what with like I said, with the government being your involuntary business partner, they want us to be more energy efficient. They're encouraging consumers to make these improvements to their home. Just be cognizant that there are limitations out there.
Speaker 5:So the $1,200 limitation is is per year and, it's really pertains to almost all of those type of improvements. There are a couple improvements that are that are part of a $2,000 per year credit. So it's still 30%. So 30% of the cost up to $2,000 per year. Those are would be heat pumps, heat pump water heaters, and biomass stoves.
Speaker 5:Previously, it was only $300. So if, John, if you spent let's let's make an example. You spent $10,000 on heat pumps and heat pump water heaters. 30% of that's $3,000. Your max credit for that category is 2,000, and then you also have that other $1,200 category with those subcategories.
Speaker 5:So the maximum for this credit, the energy efficient home improvement credit, is $3,200 if you went crazy.
Speaker 2:And that's an IRS credit, a federal, basically, a federal credit. So that's completely separated from anything that I believe pretty much every municipality, you know, city, township, etcetera, a lot of utility has their own basically, those are rebates. Those are credits. And a lot of them looking at the list when we did earlier, a lot of them follow the same, not criteria, but a lot of the same actions. Right?
Speaker 2:Like, if you replace doors, windows, heat pumps, there's a lot of credits out there for that too. So it's from my understanding of it, which I believe is the case, there is no correlation between the two of them, nor if you take one, you can't get the other one. So totally separate. So if somebody sees one of them, the opportunity is likely there on on both sides of the fence.
Speaker 5:Correct. And remember, the energy efficient home improvement credit is nonrefundable, which is which isn't good. That means that if if you have a credit of $1,200, but you only pay $800 of federal tax, you only get $800 worth of credit. That other $400 goes away. So it comes down to that tax planning, And, honestly, if people are in that situation where they're only paying a thousand, 2 thousand dollars worth of tax, that means their income isn't very high.
Speaker 5:So these credits could be extremely valuable to them, and the proper planning is important. I, you know, what we see is and especially in the defeating taxes Facebook group, unfortunately, we've had people say, well, I had this window guy come to the house, and and he told me that there's a 30% credit for every dollar I put in. And you know what? That's kind of correct, but what's not correct is that if you spent $10,000 on windows, the maximum credit you're gonna get is only $600, not 3,000. Because the windows, including the skylights, is a $600 max credit.
Speaker 5:Exterior doors are a little different. So the point is, hey. Great. Do some energy efficient home improvements. I would start maybe by having that home energy audit, have solar come out and kind of break down and and look at what's gonna qualify.
Speaker 5:We have a lot of, inspectors coming out doing these home energy audits or general contractors that are that, you know, that really it's a lead generation for them. So that's the home I mean, rather, that's the energy efficient home improvement. Now we could jump in for a few minutes into the really sexy credit. But go ahead, John. I think I cut you off, which was which wasn't No.
Speaker 2:No. No. No. You're good. You're good.
Speaker 2:I can I can talk on it at least from a a construction background a lot? I mean, I could talk on the energy efficient side, really, any of any of it from, like, a homeowner standpoint for all for a long time. Right? So that's and one thing, Chris, too, that I I really appreciate you diving into and kind of explaining for everybody too is that as a homeowner, you really do need to arm yourselves with almost the the charts that are out there on your caps within each category. Because if you do hire out and and I can speak from this firsthand.
Speaker 2:Right? Like, we had, an installation job we did on a primary residence. So sometimes you might get a a quote, and this is nothing against any industry, any sales guys at all. Just, again, kind of explaining to our audience. You might get a quote from a contractor for, say, $10,000 for installation.
Speaker 2:But, really, they show you a bottom line price of, say, $8,500. Well, they're they're making the assumption that you haven't taken advantage of any other, credits that are out there for this. So they're kind of using that as part of their sales process. Say, hey. It's only gonna cost you this, which if you've already capped everything out in the year, you actually don't get any of that.
Speaker 2:So because you may have taken advantage of it in the same category, just not for the same job, if that makes sense. So just something to be aware of. Just argue yourself with that information, and it's all out there. And you
Speaker 5:can drop some resources in. Qualifying property, qualifying expenses, and then the buckets that they go into in those those maximums. Now that all took effect in January that credit 01/01/2023, the energy efficient home improvement credit. Let's talk about the residential clean air credit clean energy credit. I've run into a couple bad actors out there in the selling the selling solar and such a, etcetera, etcetera, but let's talk about this.
Speaker 5:This, still part of the inflation reduction act, and, actually, it came into play in '20 for '20 of the 2022 year, most of it. Right? It allows you a 30% credit for energy if that if that and energy improvements to your main home, including solar, wind, geothermal fuel cells, or battery storage, battery storage technology came into play in 2023, are eligible potentially for this residential clean energy credit. That credit is also 30% of new qualified clean energy property. So new qualified clean energy property.
Speaker 5:I'm gonna run through what the clean energy, equipment is. That's eligible. But remember new. Right? So dove by a swap meet Louie.
Speaker 5:That's a rare that's a that's a song, that's an odd song that but, anyway, don't we don't buy some swap meet solar panel and think you're getting a credit. So solar energy solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuse fuel cells, and battery storage technology. Those are all potentially eligible for a 30% credit. So, John, obviously I'm in the state of Tennessee, so geothermal heat pumps aren't that popular when you're pounding through rock. Right in Michigan, where you're at, there are especially with the change in temperature, there are a decent amount of people that have invested in in our geothermal heat pump.
Speaker 5:Give you you're the one that usually puts me on the
Speaker 2:spot, so I'll put you on the spot. Uh-oh. Here we go. This doesn't happen often for everybody who's listening, so now I'm nervous.
Speaker 5:Well, I mean, what do you think the cost of a of putting geothermal a new geothermal heat pump and installation into a property that's, let's say, you know, 2,000 square foot property in Michigan? Oh, that's actually a a really good question.
Speaker 2:One that I really don't know the answer to exactly, but I could definitely say it's significant higher than a traditional system. And I'd also add, you know, as a caveat to different than exactly what we're talking about here, but geothermal up here in Michigan has really taken off in, commercial spaces, which again is not related to this credit at all, but it is something that is gaining a lot of traction or should I say getting a lot of heat in a good way. Right. But, yes, as far as for new it's it's not something that you would retrofit an old home with. This is more of a new construction
Speaker 5:opportunity. Right? Well, let's say someone has a newer home and it's $20,000, which would be very could could be it could I I would actually expect it could be more. But let's say it's $20,000. Okay?
Speaker 5:The credit's $6,000, 30 percent of the 20. And, so you get a $6,000 credit. It's it's there's no maximum, so you can take that credit. Now but here's a really cool part about this. It is refundable.
Speaker 5:So let's say your tax for the year, your federal tax is only $4,000. You wipe out all of your federal tax, and the extra $2,000 credit rolls forward on your next tax return.
Speaker 2:So Somebody's done a really good job of tax planning. They owe minimal in taxes, and then this becomes really an execution point or should say an action of planning for the year prior. So you've not only planned to decrease your tax liability in, say, '23 or '22 or '23, but now you have a carryover. Correct?
Speaker 5:Right. And you could it's really nice because you could you could pair this with a year that you're gonna have a large taxable income piece. So let's say you you had a severance package and you've been wanting to do something like this for a long time, that's something to consider. So the credit's not lost. It's carried forward.
Speaker 5:But this is why we talk about you know, whenever I hear that term easy tax return, I roll my eyes because there are so many things when you and when tax preparation that you have to be aware of. E and in the first step is looking at the prior year tax return, what if there are rollovers of energy credits now that they they give that get lost, that get dropped because you change tax software, you change tax preparers? So I know that's another issue. We've talked about that
Speaker 2:on the podcast. But, And I know, Chris, too, there is so as far as for equipment goes on this, there would be and, obviously, if somebody were to invest because it is a significant investment, say, in solar, there there's different components to it. So we had a and and, Chris, I mean, this is everybody knows that I've known this guy for over two decades. I mean, we had solar on our house in South Carolina, and that was ten years ago. So, obviously, time has changed where now you start to see different equipment, which if I remember right, part of this is you almost have it potentially broken into two buckets.
Speaker 2:So although it's under the same credit, you have the actual equipment of the physical solar panels themselves, which I believe go back to was it retroactive to '22 if I remember correctly? But the battery storage is '23 only and beyond. So let's say you've had it installed in '22. The battery storage does not count towards that. And the battery storage from my understanding, is like a Tesla Powerwall, I think, is one Right.
Speaker 2:Example. Basically, a battery backup replacing the need for an internal combustion engine generator. Lots of details there. So I know that was, something that I was kinda surprised to see in there, but it makes sense.
Speaker 5:And I wanna correct something I wanna correct something that I said about the residential clean energy credit. I mentioned that it's re the credit itself is nonrefundable as well, but it can carry forward. That so if that makes sense, the energy efficient home improvement credit, that small one is nonrefundable, and you you don't if you don't use it, you lose it. So this when I say it's nonrefundable, meaning if the credit is $6 and your tax is $4, you get the $4 back, but the $2,000 carries forward to the next year. So they're both nonrefundable.
Speaker 5:Just the the residential clean energy credit is gets to carry forward. It's not a use it or lose it. So it's really an attractive attractive
Speaker 2:offering. So And they get it they're getting a carryover towards the next year. They're not gonna get check-in the mail saying, oh, here's the difference. Here you go. Correct.
Speaker 5:But it would so but it would offset any federal tax in that year. So, obviously, there are a lot more, there's some limitations. You have to make sure that you're working with the proper company. You have to make sure that you're buying, the, you know, qualified equipment. You know, so and and but the last thing I wanted to touch on is, this sounds great.
Speaker 5:People might be saying, okay. How do I get this credit on my tax return? These are these credits are all applied for and reported on something called a form fifty six ninety five, residential energy credit form, and attached to your personal tax return. Now businesses could potentially be eligible for some some of these credits, although these are we're we're we're talking about personal credits right now. There are separate credits for businesses, in other words, but the residential clean energy credit and the energy efficient home improvement credit are both, reported on your form fifty six ninety five and attached to your personal tax return.
Speaker 2:Excellent. Excellent. So, yeah, to anybody that's listening to this, the best advice I again, Chris, thank you for for, I should say, appeasing my not demands. My request, I should say, to touch on this topic. I know people ask about it a lot.
Speaker 2:You know, it's one of those things, at least, again, from personal experience even, you know, looking back to solar. Obviously, everything was a lot different eight, ten years ago when we did it. And now there's obviously a bigger push. And something that I mentioned earlier on too is, you know, I would say that my my takeaways from this and, again, as everybody knows, I am not a tax professional, not not one quarter of a tenth of a percent of what Chris is. But from a homeowner's perspective, why I mentioned that Facebook group, it's our old house, is if you could arm yourselves with two, we'll say, palettes.
Speaker 2:We'll use that constructor. Palettes of information. I would I would strongly recommend, obviously, looking at the credit in detail, identifying, you know, what makes sense now, what makes sense later. Chris, I want would a % support your comment about starting with a, energy efficient audit. And, actually, a lot of municipalities and, and or utilities now require that before you get some of their rebates, which again is different.
Speaker 2:So and they're usually and if I think we paid, like, $300 or $200, and they do what's called a blower door test and everything good there. Look it up if you want more information. But, obviously, arming yourself with that information, but then then also getting on those Facebook groups, talking to other people that have done those jobs, especially if you are a DIYer. What I would almost caution people to is really don't let the credit maybe entice you too much to just start doing things because you think you're getting something for free. We just did a little recording the other day.
Speaker 2:Like, a business write off does not mean free. So just take that into account. Arm yourself with that information. If you do have any specific questions on this, our defeating taxes Facebook group is actually a great place to get great information from tax professionals. So there's great groups out there who's mentioned that one for other homeowners.
Speaker 2:The defeating taxes one is probably the best. And, of course, we're, very biased because it's one that that we're very active in. But ask those questions on there. The, the audience and the makeup of the others on that group, are exactly who you wanna talk to. So anything else to to close-up with, Chris, before we wrap?
Speaker 5:Absolutely. I would say to close-up, there's no light takeaways from here. There are no there's no lifetime exclusion, or limits to these credits. They could they are very generous. There are some limitations either on residents on what type of expenditure, so the the solar credit for what we call the solar credit, but it's really not called the solar credit.
Speaker 5:The residential clean, energy credit, the benefit can carry forward to future years. Final thing to consider, if you're sitting around thinking, especially for you know, we these most of the credits came into vogue here in 2023, but the the, the residential, clean energy credit, if you did that in '22 and you just listened to this, guess what? You can amend your tax return and to still take that credit. So think about that. Again, jump into defeating taxes with any questions, and thank you guys so much for listening.
Speaker 2:Absolutely. Absolutely. Well, thanks, Chris, for diving into this, explaining this to us from a from a tax side. And as always, we will see everybody next week.
Speaker 3:John here from the TTF team. Thank you again, everybody, for hanging out with us on this episode where me and Chris dove into some of these energy credits put forth by the IRS and Congress. And so that being said, we gave you a lot of information, hopefully clarified some of these credits for you, so made it a little easier to understand. There is a lot more detail we could have gone into which I'm sure we're absolutely going to do on a later episode, but until then check out that defeating taxes private Facebook group. There are some other resources we put in the show notes on here, and also I would be completely remissed if I did not mention that this Friday, it's right a couple days away here, we are doing our tax planning master class live with the TTF team.
Speaker 3:So drop in the link also in the show notes to register for that. Again, you only have a couple days. That's this Friday on the twentieth, so do not forget to register for that. You need to register in order to attend. We are limiting space on this just so we don't have everybody and their cousin on it.
Speaker 3:We want it to be an atmosphere where you can ask questions, get some responses, and leave with a ton of information ready to implement. So that being said, register for that as well, and we will see everybody on Friday at the tax planning master class as well as next week right back here on this podcast.
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