Congress uses tax deductions and tax credits to influence taxpayers’ actions. For instance, it seeks to stimulate taxpayers to reduce their energy consumption and moving away from the use of fossil fuels. In this article, we explore the benefits and drawbacks of two major incentives: the home-solar credit and the electric-vehicle credit.
Tax credits come in two types: refundable and nonrefundable. Refundable tax credits apply even for taxpayers who owe no tax. On the other hand, nonrefundable tax credit can only offset actual tax liability; any excess is lost (or, in some cases, carried over for a limited number of years until used up).
Solar Power – The credit for installing solar-energy systems for generating electricity or heating water at a first or second home is currently a whopping 30% of the cost of the solar installation. However, the credit amount is scheduled to begin phasing out after 2019, dropping to 26% in 2020 and 22% in 2021; after that point, the credit will expire. The unused credit does have a limited carryover and can be added to the allowable credit in the subsequent year.
Although solar manufacturers are quick to mention the 30% credit, they generally avoid mentioning that the credit is nonrefundable and has a limited carryover, which causes potential buyers to believe that the federal government always pays 30% of the installation cost. This can lead to very unpleasant surprises and even financial hardship when the purchaser of a home-solar system does not get the full credit. Thus, before proceeding with a solar-power purchase, make sure that you contact this office to find out how the credit will benefit you.
You should also take a hard look at your average monthly electric bill so that you can calculate how long it will take for the solar-power system to pay for itself based on the system’s cost and on the loan interest (if the purchase is financed). You should also consider whether the system will increase or decrease the value of the home. You may discover that a solar-power system is not right for you.
You do not have to be the owner of the home where the system is installed to take this credit, but you must be the owner of the solar property. The tax code does not specify that the taxpayer has to also own the home—only that the taxpayer must own the solar-power system and that the system must be installed at the taxpayer’s residence. For example, an adult son who lives with a parent in the parent’s home and who pays for a solar installation on that home would be able to claim the credit—but the parent would not be able to.
The credit is also available for additions to a solar-power system (but not repairs or replacements). For example, if a taxpayer previously installed a solar-power system and then added more panels to it in 1999, those newly added panels will qualify for the credit on the taxpayer’s 2019 Form 1040, even if the taxpayer received a credit for the original installation.
To be eligible for the solar-power credit, you must be the owner of the energy property. If it is leased, then you receive no credit. In addition, be aware that, if you decide to sell a home that has a leased solar-power system, transferring that system’s lease to the buyer may be problematic. The buyer may not want the solar-power system but canceling the lease (which is required for the home sale to be finalized) generally requires paying off the balance owed. Even if the buyer actually wants to assume the lease, the leasing company may not consider the buyer to be credit-worthy, which could put a damper on the sale or even cause it to fall through.
Plug-in Electric Vehicles – The plug-in electric-vehicle credit applies to new plug-in electric cars or light trucks (weighing less than 14,000 pounds). Technically, the tax credit is actually made up of two parts: the base amount of $2,500, for which the electric vehicle must have a battery with at least 5 kilowatt-hours of capacity, plus an additional $417 credit for each kilowatt-hour of battery capacity in excess of that amount. The maximum total credit is $7,500. Luckily for those who don’t know a watt from a volt, the IRS website provides the credit that is available for each specific vehicle.
However, the electric-vehicle credit begins phasing out for a particular manufacturer’s vehicles when it has sold at least 200,000 qualifying vehicles for use in the United States. After the quarter in which that number is reached, the credit for that manufacturer is reduced to 50% of the original amount for the next 2 quarters and then 25% of the original amount for two final quarters.
The plug-in electric-vehicle credit applies regardless of whether the vehicle is purchased or leased, and if a taxpayer purchases multiple qualified vehicles in a year, that person can claim the credit for each vehicle. If a vehicle is used entirely for personal use, then the credit is nonrefundable, and any amount not used to offset the taxpayer’s current-year tax liability is lost. However, if the taxpayer uses the vehicle for business purposes, then the business portion of the credit is a general business credit, which can be carried back by one year and then forward for 20 years (or until it is used up).
As you can see, the amount of credit that you actually receive for installing home solar or purchasing a plug-in electric vehicle may be much less than advertised. We encourage you to call this office before making such a purchase so that we can estimate the actual benefit of the credit based on your tax situation.
Have a question? Contact Charles Woodson.