When you are upgrading your house, you are already getting a lot of value out of it. You will be living in the place after all and you benefit from the changes. But you can get more bang for your buck. The federal government is encouraging people to make some changes by issuing tax credits for them.
If you want to cut down some expenses of the installation, here are some potential changes you can make:
How They Work
The idea behind these tax credits is very simple. You simply install the home improvement and then you can apply for the credit. There are several tax credit types available and there are different requirements for each. All of them cover taxes up to the year 2021 and there have been some adjustments for the various years starting 2018.
For you to claim them, you’ll need to complete IRS Form 5695. Submit it along with your taxes so that you can have a claim for the tax-deductible. Take note that these deductions can change the value of your house when it comes to sales. For example, when selling your home with the improvements, you’ll have to add your deductions to the capital gains, which is taxable. This should not be a problem if you don’t plan to sell the house any time soon.
Residential Renewable Energy Tax Credit
One of the easiest tax credits to claim is the residential renewable energy tax credit. This covers the different renewable energy upgrades that you can install in your home. There are several of them and they can all be very effective. The tax credits that you get from them depend on when they were installed. Homeowners get 30 percent for renewable energy systems placed in service by December 31, 2019.
This has been extended up to 2022. Now, a renewable energy system installed after the first deadline but before January 1, 2021, gets a 26 percent tax credit. Those who installed after December 31, 2020, but before January 1, 2022, get a 22 percent discount. For example, if you contact one of the solar power companies and had solar panels installed in your home for $2000 before the end of 2021, you can get around $440 of tax credits. That’s a big cash return on your investment.
This tax credit would apply to geothermal heat pumps, wind turbines, solar panels, and fuel cells. You can install multiple renewable energy systems in your home and claim them.
Equipment Tax Credits for Primary Residences
It is not just renewable energy that can get you tax credits. It is also simple home improvements that can help with a house’s energy efficiency. They were originally set to end on December 31, 2017, but they have been extended to cover improvements that were made up to December 31, 2020. Homeowners can either get 10 percent of the installation costs up to $500 or they can get a specific amount between $50 to $300. This depends on what changes were made to the house.
For insulation and roofing, owners can get a 10 percent tax credit. This does not include the installation costs but only the price of materials. This also covers the windows, doors, and skylights of the house. The only other requirement is that they meet the Energy Star requirements for energy efficiency. You’ll get the most credits for roofing and the various home entrances since those are usually expensive.
The additional equipment covered by the specific amounts covers central air conditioning, heat pumps, boilers, and other HVAC installations. The tax credit is usually around $300 which can put a dent in their price.
Tax Credits for Home Builders
While most of the tax credits are for upgrades to existing homes, you can also get tax credits for a home built from the ground up. There are two main tax credits. One is $2000 for any home builder that has 50 percent energy savings over the 2006 International Energy Conservation Code (IECC). You will already be saving a lot of money from the energy-efficiency.
The additional expense of installing the necessary equipment will pay for itself after several years. Your tax credits allow you to earn back your investment much earlier. If you can only reach 30 percent since you did not want to go all the way with the changes, then you can apply for $1000. That is still a large amount of tax credits.
Federal tax credits are a great way to reduce your tax burden. Yes, you spent some of that money for home improvements so you’re technically not getting anything back. But lower taxes shouldn’t be anything to complain about. Use all these to your advantage to ensure your home is at its best when it comes to energy.