EVs, heat pumps and solar panels: What advisors say about new tax credits

For clients who are looking to make their homes more energy-efficient or upgrade to electric vehicles, there may be no time like the not-too-distant future.

Or, in some cases, the present.

Under last year’s monumental Inflation Reduction Act, taxpayers can get big credits for things like heat pumps, solar panels, energy-efficient windows and domestically produced EVs.

How and when to take advantage of the potential savings is where advisors and tax professionals come in. There are restrictions around income, the specific types of upgrades clients make and how they should claim the tax credits, advisors say.

“There are many changes [to the tax incentives], but one that will be most impactful is the credit for energy-efficient upgrades. It changed from a lifetime credit to an annual credit. That means you can get more bang for your buck if you spread out your expenses,” Robert Persichitte, financial planner and tax accountant at Delagify Financial, said in an email. “The credit only applies to the first $4,000 in spending, so if you can stretch your home improvement project over several years, you can double or even triple the amount you receive.”

Such strategies could be increasingly important in a tight housing market. As interest rates have risen substantially, many homeowners who locked in low mortgage rates years ago are staying put, as terms for new loans to upgrade to a new house are now far less favorable. That, according to a recent report in the Wall Street Journal, has caused a housing supply shortage. Because of that, home prices haven’t come down much, if at all, and interest rates are the highest they’ve been in many years.

Just because many homeowners are putting off moves doesn’t necessarily mean that they should upgrade their existing homes, though.

“If clients have a purchase decision or a household need where energy efficiency comes into play (car, appliance, etc), I do advise them to consider the tax incentives,” Julia Colantuono, owner of One Financial Design, said in an email. “I don’t necessarily think the tax credits should drive their decision in all cases, but it could be the deciding factor that ultimately leads them to choose one product over another.”

For example, people may be able to claim up to $14,000 in rebates associated with appliances and other improvements, she said.

“I can think of a couple clients specifically who have received these payments for making energy-efficient upgrades to their home, and were very happy they did so,” she said.

While the IRS has been rolling out guidance this year to clarify what improvements and purchases are eligible for rebates, consumers don’t need to rush.

“With the credits extending for 10 years, there is time for clients to do thorough research and plan in advance to make some of these improvements as well as staging improvements to maximize credits for those with annual limits,” Karen Ogden, partner at Envest Asset Management, said in an email.

For example, the qualifications around heat pumps “are very specific,” Ogden said.

The incentives for rooftop solar voltaic panels can be substantial, as there's no dollar limit on credits — it's 30% of the cost, she noted.

While rooftop solar systems were eligible for a 26% tax credit if installed in 2020 and 2021, that rate increased to 30% last year, and it won’t go back down to 26% until 2033, falling to 22% in 2034, according to the Department of Energy, which states that “there is no maximum amount that can be claimed.”

Although that applies to panels, batteries, solar hot water and geothermal heat pumps, it can also extend to fixes necessary to make those improvements — one client was able to deduct 30% of the cost of roof repair, Ogden said.

Window replacement is also a hot area for some clients.

“Where I am in South Florida, many of us live in homes constructed prior to the enactment of the 2002 Florida building code, which established impact-resistant window requirements for many new builds,” said Chris Diodato, founder of WELLth Financial Planning. “Surprisingly, I’ve found most don’t know they can pocket a cool $600 tax credit for making the replacements, as the thick glass on impact windows makes virtually all impact windows Energy Star qualified, and thus eligible for the tax credit.”

And for people who are eager to buy that Tesla Model Y — particularly as the company recently lowered its prices — the new incentives can be attractive. They will have to ensure, however, that the “final assembly” of the car took place in North America in order to claim up to $7,500 in tax credits.

“Beginning in 2024, taxpayers will have the option to transfer the credit to the dealer at the point of sale to directly lower the price of the vehicle,” Noah Damsky, principal at Marina Wealth Advisors, said in an email. “That means you won't have to wait until tax filing to realize the incentives — you can get the discount immediately at purchase.”

This year, used electric vehicles will also be eligible for tax credits of up to $4,000, or 30% of the price, whichever is lower, according to the Internal Revenue Service.

But there are limits on adjusted gross income for those claiming credits related to purchasing new vehicles. For new cars, the limit is $150,000 for single taxpayers, $225,000 for those filing as heads of household and $300,000 for those who are filing jointly or are surviving spouses.

“The income limits increase for married couples, so a single person may not qualify today, but when they get married, they may qualify then,” Damsky said. “Be mindful as to how tying the knot could be a plus or a minus, and how it can influence timing.”