It's no secret that the current administration is concerned about climate change. While you may or may not agree with their concern, they've given you the opportunity to save on your taxes by going green. The Inflation Reduction Act (IRA...like we really needed a duplicate acronym) provided for tax credits for making energy efficient improvements to your home and by purchasing plug-in electric vehicles.
The Energy Efficient Home Credit
The Energy Efficient Home Credit applies to changes made to your home(s). Prior to the IRA you could only get credits for improvements made to your primary residence. Under the IRA, you can claim the credit for a dwelling unit you use as a residence (along with a few other restrictions). That means you can potentially claim the credit on a second home, RV or boat.
The Energy Efficient Home Credit is divided into two parts. The first covers the dwellings envelope (think windows, doors and insulation) and is called qualified energy efficiency improvements. The second, called residential energy property expenditures, covers things like heat pumps and water heaters. The credit is equal to 30% of the amount paid for qualified energy efficiency improvements plus residential energy property expenditures or $1,200, whichever is less. Prior to the IRA, there was a lifetime limit on the credits. The limit is an annual limit. With that said, there are other limits on the credit. The amount of the credit is reduced for windows and doors. Just to make things a little more complicated certain heat pumps, heat pump water heaters and biomass stoves and boilers are exempted from the $1,200 limit and a different limit of $2,000 applies for these items. Simple. Bottom line: If you make improvements to your home that increase the energy efficiency of your home or you replace equipment, you may be eligible to reduce your tax bill.
The Congress really wants you to do this, so they added another credit for getting a Home Energy Audit. You will get a dollar-for-dollar credit for the cost of the audit up to a total of $150 if the audit is conducted by a certified home energy auditor and the audit identifies the most significant and cost-effective energy improvements to the dwelling. This credit only applies to your primary residence.
Clean Vehicle Credit
The government will also reward you for purchasing a qualified plug-in vehicle. There are several requirements to be a qualified vehicle. First, the vehicle's final assembly must occur in North America. The vehicle must meet critical minerals requirements and a battery component requirement. If it does you can receive a credit of $7,500 ($3,750 for each requirement). You'll need to rely on the dealer to tell you (and the IRS) that the vehicle is qualified. But it doesn't stop there.
If the vehicle costs too much you can't take the credit. For vans, SUVs and pickups the MSRP must be less than $80,000 and for all other vehicles the limit is $55,000. If you make too much the credit goes away too. If you file as a married couple, the credit goes away if your Modified Adjusted Gross Income (MAGI) is more than $300,0000. For those that file as single, the credit is eliminated at $150,000 of MAGI.
There is also a credit for used plug-in vehicles as long as they are purchased from a dealer. The credit is 30% of the vehicle's price or $4,000, whichever is less. There are income limits for this credit as well and they are 1/2 the MAGI listed above.
Both credits can be transferred to the dealer and used as a down payment on the vehicle.
I always say that inherited IRAs (the old IRA) are the most complex thing in the tax code. I think these new credits may give them a run for their money.
Military Finances are Different
These tax credits apply to all taxpayers. That isn't always the case though. There are several places the tax code treats military members differently than civilians. You also have benefits your civilian counterparts don't have. That is why we think you should work with a financial planner/advisor that deals with those differences each and every day. If you'd like to find out how we do that, use the button below to schedule a free initial consultation.
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