What You Should Know about Deducting Energy Efficiency Upgrades

22 Feb What You Should Know about Deducting Energy Efficiency Upgrades

The Tax Cuts and Jobs Act introduced a few years ago began a steady decrease in the deductible amount for renewable energy and other home efficiency upgrades. Now, most of those deductions and credits will be going away at the end of this year, if Congress doesn’t renew them. If you’re filing a return that includes energy efficiency upgrades made in 2020, or if you’re planning to make some upgrades this year before the tax credits disappear, there are a few things you’ll need to know.

What Kinds of Upgrades Qualify?

There are three basic categories of energy efficiency upgrades that may qualify for a deduction or tax credit on your return. They are:

  1. Renewable energy sources – This includes any type of system that generates its own energy. The most popular system in this category would be solar panel arrays, but geothermal heat pumps and small wind turbines would also qualify.
  2. Energy-efficient home systems – Upgrading the systems in your home to more efficient models can also qualify for a tax credit. This would include (but is not limited to) central air conditioning systems, water heaters, and furnaces.
  3. Upgrades for improved efficiency – Finally, upgrading your home’s structure to be more energy efficient can also qualify for a tax credit. This includes installing insulation, more energy-efficient roofing, and higher-quality windows, doors, and skylights that reduce the transfer of heat between your home and the outdoors.

New equipment installed to improve your home’s energy efficiency must meet certain efficiency requirements to qualify for the tax credit, so be sure to do your research or consult with a tax professional in Provo to find out if your upgrades qualify.

How Much Can You Deduct?

The amount you can deduct or the size of your tax credit will vary based on a number of different factors, so again, please reach out to us if you want to get a more accurate estimation on your home upgrades’ deductibility. However, most renewable energy equipment installed and put into service in 2020 is eligible for a 26% deduction on your 2020 taxes. If you’re planning to install renewable energy equipment in 2021, you’ll likely be able to deduct 22% of the total cost.

The total tax credit for upgrading to energy-efficient systems within your home will vary, but is typically around 10% of the equipment’s total cost, with a maximum credit of $500. This also applies to any upgrades that you make to your home’s structure to improve its overall efficiency; the one exception is for windows, which are capped at a $200 credit. However, please note that the percentage for these upgrades is calculated off of only the equipment’s or material’s cost, and not the cost of labor or installation.

Get Help Claiming Your Deductions and Credits

If you’ve been considering making energy-efficient upgrades to your home or installing a renewable energy source, 2021 is the year to do it. As we already mentioned, these credits and deductions are slated to expire on December 31st this year.

If you have made energy upgrades in the last year, you can claim your residential energy credits on Form 5695 and attach it to your tax return. Ensuring that you’re claiming the right credits can be complicated. To ensure that you get the full credit or deduction amount that you deserve, please reach out to a tax professional in Provo for assistance. Our accountants can help you ensure you claim these items correctly on your return and get the maximum possible benefits. Call The Accounting Guys today to schedule a consultation.

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