Homeowners know that keeping a residence in shape is a continual effort. Most of the time, we're just trying to keep things running. That maintenance is necessary, but it doesn't do much for us when it comes to taxes.
But if you decide that instead of just fixing that cranky old furnace, it's time to go greener, you could get a tax break. Geothermal heat pumps are just one of the home upgrades that qualify for the renewable energy tax credits.
If you took advantage of any of them in 2021, be sure to claim them on the tax return you're working on now. If you're considering these energy-efficient home upgrades, the tax credits are in effect through Dec. 31, 2023.
So exactly what residential alternative energy actions qualify? Here's overview.
Solar energy system: This includes solar panels or photovoltaic systems that capture energy from the sun and convert it directly into electricity for your residence. Solar water heaters also qualify. These systems can be installed in your primary residence, or second home.
Small wind turbine: A residential wind turbine collets kinetic energy from the wind and converts it to electricity. The system must generate no more than 100 kilowatts of electricity for residential use. Installation costs count toward figuring the applicable tax credit. The home with a turbine system doesn't have to be your main home.
Geothermal heat pump: Geothermal heat pumps are similar to ordinary heat pumps, but use the ground instead of outside air to provide heating, air conditioning and, in most cases, hot water. The tax credit covers installation costs. The geothermal system does not have to be at your principal residence.
Fuel cell system: Fuel cells are electrochemical systems that provide high fuel efficiency while discharging extremely low emissions. p power generation. The system must be installed at your primary resident. Installation costs count toward the tax credit.
Biomass fuel stoves: This energy option first became eligible for tax credit treatment in 2021. These stoves burn biomass fuel to heat a home or heat water. Biomass fuel includes agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants, grasses, residues, and fibers.
Credit qualifications, amounts: Generally, the tax credit for these residential energy upgrades must be claimed on the tax return for the year that installation is completed.
The credit is phased out for the remaining years that it is in the tax code. The applicable percentages are:
- 30 percent for property placed in service after Dec. 31, 2016, and before Jan. 1, 2020 (in case you need to amend a return),
- 26 percent for property placed in service after Dec. 31, 2019, and before Jan. 1, 2023, and
- 22 percent for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024.
The timing is slightly different for biomass fuel stoves, since they only became eligible in 2021. In this energy efficient case, any qualifying biomass stove purchased in 2020, but which was not installed until 2021, can be claimed on your 2021 tax return. The qualifying percentages here are the same 26 percent and 22 percent shown in the preceding bullet points.
You can find more on all these tax credit at the Energy Star web page, as well as in the instructions for Form 5695, Residential Energy Credits. This is the IRS form you'll file with your Form 1040 to claim the credits.
Yes, these alternative home energy systems are more expensive. But in the long run, they should save you much more on utility bills.
And remember that the bonus from Uncle Sam for converting to them is a tax credit, which is a dollar-for-dollar offset of any tax you owe.
You also might find these items of interest:
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- Tax difference between home repairs & home improvements
- Going green this St. Patrick's Day with renewed residential energy tax credits