How Green Tax Credits Work


Solar panels and other green improvements have, at various points, been a way to get tax credits.
Solar panels and other green improvements have, at various points, been a way to get tax credits.
Andreas Weber/iStockphoto/ThinkStock

Henry David Thoreau wasn't America's first environmentalist, but he was certainly one of the more vocal ones to come onto the scene in the 19th century. The celebrated author and noted loner was an early advocate for environmental stewardship. When he traipsed off to Walden Pond to live in seclusion, Thoreau did so with the intent to live simply and minimize his impact on the natural surroundings. What was the result of this bold move? A book ... and a hefty tax bill. You see, Thoreau, who later wrote "Walden" based on his experience in the woods, was thrown in jail during one of a few trips into a nearby town when he refused to pay the poll taxes he'd been avoiding for years.

These days, U.S. tax authorities are a little more accommodating of folks who want to live the green life. The Internal Revenue Service isn't going to let you off the hook for unpaid taxes if you hole yourself up in a cabin in the woods, but federal lawmakers have enacted some incentives for folks who make their homes and cars more energy efficient. Some of those incentives recently expired, and their long-term fate remains unclear. Others are still available for bigger ticket energy efficiency projects.

The Renewable Energy Tax Credit

The Renewable Energy Tax Credit is one of the few tax incentives for individuals and families going green still in place in 2014. It was created under The Energy Policy Act of 2005 and can be claimed by taxpayers through at least 2016. The credit applies to various efforts to make your home more energy efficient, including the installation of solar-electric systems, solar water heaters, small wind-energy systems and geothermal heat pumps [source: Department of Energy].

Tax filers who are eligible for the credit can claim 30 percent of the money they spend on renewable energy improvements, so long as the costs were incurred on a home owned by the taxpayer. For those who install energy efficiency systems in a new home, the costs can be applied to a credit for the tax year in which the person or family moves into the residence [source: Department of Energy].

Unlike many other tax credits — and a former version of this one — there is no cap on the dollar amount for most covered improvements put in place after 2008. One exception to that rule is the installation of a fuel cell, a compact heat and power system that converts natural gas into hot water and power for a home. These systems are eligible for a renewable energy credit of $500 for every 0.5 kilowatts (kW) that the fuel cell has in capacity. To obtain the credit for a fuel cell, it must be installed in the taxpayer's principal residence [sources: Department of Energy, Fuel Cell Residential].

Each of the renewable energy improvements covered under the credit has to meet certain eligibility requirements. A solar heating system, for instance, has to be certified by the Solar Rating Certification Corporation, or a similar entity approved by the government of the state in which the system is installed. Geothermal pumps, on the other hand, must meet federal Energy Star criteria. A list of the requirements for various credit-eligible systems is available on the Energy Department's website [source: Department of Energy].

ARRA Tax Credits

A number of other tax credits put in place through the American Recovery and Reinvestment Act — and later extended by the American Taxpayer Relief Act — expired at the end of 2013. Some federal lawmakers on both sides of the aisle, businesses who have taken advantage of green tax incentives, the energy efficiency industry and the environmental advocacy crowd have been pushing Congress to renew the credits. It's not clear whether the tax savings would be made available retroactively in the event that the credits are renewed [sources: IRS, Barron-Lopez].

The Residential Energy Property Credit, for example, provided a tax break to homeowners who made their residences more energy efficient without making some of the more drastic and costly moves covered under the renewable energy credit. That includes installing insulation, energy efficient exterior windows and energy efficient heating and air conditioning systems. The credit was good for 30 percent of the cost of these improvements, up to a maximum of $1,500 [source: IRS].

For green drivers, the Plug-in Electric Drive Vehicle Credit offered tax savings of $2,500 to $7,500, depending on the car's battery capacity. The credit applied to plug-in electric cars with four or more wheels that weigh less than 14,000 pounds. A similar credit for two-and-three-wheeled vehicles — and those capable of only lower speeds — covered 10 percent of the vehicle's cost, up to $2,500. Finally, the feds allowed drivers who converted their cars to plug-in electric vehicles to take a credit for 10 percent of the associated costs, up to $4,000 [source: IRS].

Green Tax Incentives for Businesses

Individuals and their families aren't the only ones who can save some money come tax time by going green. Like the Renewable Energy Tax Credit, the Business Energy Investment Tax Credit allows companies to shave some of the associated costs after investing in making their properties more energy-efficient. That includes the installation of systems like solar power, small wind turbines, fuel cells, microturbines and combined heat and power (CHP). (CHP uses a single fuel source, like natural gas, coal or oil, to produce electricity and heat simultaneously.) The business energy credit is available for systems and improvements put in place before Dec. 31, 2016 [source: Department of Energy].

The credit is generally 30 percent of the expenditures related to an eligible improvement. It has no maximum when applied to systems like solar power and wind turbines. The credit for fuel cells tops out at $1,500 per 0.5 kWs, making it three times the size of the same credit for individual homeowners under the RETC. For geothermal systems, microturbines and CHP systems, the credit is 10 percent of costs. Microturbine credits are capped at $200 per kW of capacity [sources: Department of Energy, Environmental Protection Agency].

Businesses also saw a number of significant tax breaks fall by the wayside when the ARRA expired. Among them were programs allowing companies to use tax credit bonds to finance facilities that generate electricity from renewable sources, and to pay for various conservation programs, like the reduction of greenhouse gases. The law also extended a credit for businesses that create various types of renewable energy, as well as those who own property used for refueling alternative fuel vehicles [source: Department of Energy].

Of course, there's one thing that separates many businesses from us ordinary folks: money. All that cash means companies that saw significant savings from green tax credits can spend some dough on lobbying lawmakers to bring these and other incentives back.

Author's Note: How Green Tax Credits Work

Going green is about two things: changing the type of energy sources that you use and making existing sources more efficient. The latter effort is one that I propose people add to their daily lives, even outside of the way they power their gadgets and fuel their cars. Momma always said "If you ain't got nothing good to say, shut your yap." This is a model of human efficiency. I'm done talking.

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Sources

  • Barron-Lopez, Laura. "Reid promises vote on green tax credits." The Hill. Sept. 4, 2014 (Nov. 25, 2014) http://thehill.com/policy/energy-environment/216654-reid-plans-vote-for-renewable-energy-tax-credits
  • Fuel Cell Residential. "Welcome." (Nov. 25, 2014) http://www.fuelcellresidential.com
  • Internal Revenue Service. "Energy Incentives for Individuals in the American Recovery and Reinvestment Act." April 28, 2014 (Nov. 25, 2014) http://www.irs.gov/uac/Energy-Incentives-for-Individuals-in-the-American-Recovery-and-Reinvestment-Act
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  • U.S. Department of Energy. "Residential Renewable Energy Tax Credit." (Nov. 25, 2014) http://energy.gov/savings/residential-renewable-energy-tax-credit
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