What Is Energy Tax Credit
Energy tax credit is a federal income tax credit that subsidizes the installation of solar panels, wind generators, geothermal (ground source heat pumps), small hydroelectric and biomass systems.
The energy tax credit has been in effect since 2005 and was extended to 2023 by the Energy Improvement and Extension Act of 2008. It can be applied against tax liability dollar for dollar.
Under the Consolidated Appropriations Act of 2021, the renewable energy tax credits for fuel cells, small wind turbines, and geothermal heat pumps now feature a gradual step down in the credit value, the same as those for solar energy systems.
Tax Credit:
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30% for systems placed in service after 12/31/2016 and before 01/01/2020.
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26% for systems placed in service after 12/31/2019 and before 01/01/2023.
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22% for systems placed in service after 12/31/2022 and before 01/01/2024.
Home Equipment Eligible for Residential Energy Property Credit
Equipment that qualifies for the residential renewable energy tax credit includes solar, wind, geothermal and fuel-cell technology:
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Solar panels or Photovoltaics - The electricity generated must be used in the home.
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Solar-Powered Water Heaters - The water heated by the system must be used inside the home and at least half of the home's water-heating capacity must be solar. (Note: Solar heaters for swimming pools and hot tubs do not qualify).
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Wind turbines that generate up to 100 kilowatts of electricity for residential use.
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Geothermal heat pumps that meet federal Energy Star guidelines.
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Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home. The equipment must generate at least 0.5 kilowatts of power.
Who Qualifies for Energy Tax Credit?
You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019, 2020, and 2021 the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:
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$50 for any advanced main air circulating fan
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$150 for any qualified natural gas, propane, or oil furnace or hot water boiler
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$300 for any item of energy-efficient building property
The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.
Property Tax Exemptions for Renewable Energy Systems
Because of the possibility of property values increasing, property owners are hesitant to install renewable energy generation systems, like solar panels and geothermal, even with the incentives and rebates in place.
One way to balance this out is through the creation of ordinances among states and local governments that exempts from property taxes the value augmented by the addition of renewable energy generation systems.
This will encourage people to own and install renewable energy systems without worrying about an increase in property values, therefore increasing their property tax.
The ordinance may contain the following provisions:
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types of renewable energy systems that qualify for the tax exemption; and
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maximum amount that can be exempt
These ordinances not only benefit residential owners but commercial owners as well.
Effects of Property Tax Exemption
Reducing greenhouse gas (GHG) emissions and other pollutants, encouraging healthy living and promoting local economies are just a few benefits by providing a community with property tax exemptions for renewable energy systems.
Usage of renewable energy sources will result in fewer burning of fossil fuels, reduced GHG and other air pollutant emissions therefore eventually mitigating climate change impacts and improving air quality.
Local governments that implement tax exemptions for renewable energy systems result to the following:
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Makes it easier and more affordable to own and keep a home that uses renewable energy systems
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Creates a desirable location for prospect homes after providing exemptions for the assessed added value of property after the installation of a renewable energy system.
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Increases the value of an area as a whole since owners are encouraged to improve their property towards a more sustainable and environment-friendly living.
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New jobs will be created to install and maintain renewable energy sources.
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Stabilizes utility prices since homeowners are switching to the use of inexhaustible resources, such as wind and solar, which in turn will lower energy cost.
Other Ways to Save
Aside from being exempt from property taxes, there are other ways to save when installing renewable energy systems.
Many utility companies have rebate programs that will reimburse homeowners for a percentage of the cost of installation. The rebates can be found through your local power provider or by searching online.
Some states have put in place net metering laws, which allow the owner of a renewable energy system to sell excess power generated back to the power provider.
The net metering allows for homeowners with solar panels on their rooftops or even large commercial properties, such as schools and warehouses, to be reimbursed for energy not used.
Key Takeaways
The additional value that renewable energy systems can bring to one’s home or business is substantial.
Benefits include the reduction of GHGs, increased property value, and stabilization of utility prices.
While some homeowners are initially hesitant about purchasing a new system due to the initial costs associated with installation, many are finding that tax exemptions for renewable energy sources on their homes and businesses can offset the costs in a few years and lead to higher property values in desirable locations.
With more local governments creating energy-friendly tax policies that offer incentives for homeowners, such as exemptions from taxes or subsidies for installation costs, renewable energy systems may become even more popular.
While installing a residential solar panel system is not for everyone, the benefits outweigh the costs. For those who are able to afford it or find funding for renewable energy sources, they will likely find that the initial costs are outweighed by savings over time with stable utility prices and increased value on their home.
FAQs
1. What is an energy tax credit?
An energy tax credit is a type of deduction that reduces one’s overall tax liability.
2. Who qualifies for energy tax credits?
Individuals and businesses qualify to take advantage of the residential energy tax credit, depending on their type of spending.
3. What are some examples of residential energy property?
Examples include solar panels, wind turbines, geothermal energy equipment and fuel cells.
4. How does one qualify for property tax exemptions?
Most states provide exemptions to individual homeowners who install renewable energy systems. In most cases, the state decides how much of a credit they will offer for each system based on its size or capacity.
5. What are net metering laws?
Net metering laws allow homeowners to sell excess power generated back to their utility provider on a one-to-one basis at retail rates. This allows for full or partial reimbursement for excess energy used.
