While the Biden administration’s Build Back Better Act remains stalled in the Senate, lawmakers may be able to advance some parts of the legislation, including tax credits for electric vehicles, solar panels and home energy efficiency that have wide appeal to voters.
The Qualified Plug-In Electric Drive Motor Vehicle Tax Credit has become more popular as car makers increasingly focus on producing electric and hybrid cars. As the price of gasoline and home heating oil continues to rise due to inflation and more recently the war in Ukraine and growing sanctions on Russia, consumers are looking for ways to reduce their dependence on petroleum. Many people are also concerned about climate change, with the United Nations’ Intergovernmental Panel on Climate Change releasing a worrisome report last week that found the world faces multiple climate hazards over the next two decades as temperatures rise another 2.7 degrees Fahrenheit. The report warns the impacts of global warming have become nearly irreversible and over 40% of the world’s population are highly vulnerable to its effects. Tax credits can provide incentives for both consumers and businesses to move away from fossil fuels to cleaner forms of energy that help protect the environment and the pocketbook.
“These green tax credits and incentives are really a targeted move by the federal and some state governments to entice individuals and businesses away from using liquid fossil fuels and natural gas to using electric technology to reduce greenhouse gas emissions,” said Shannon Christensen, an attorney and author with Thomson Reuters Checkpoint. “The Build Back Better legislation is currently stalled, but if it ever does pass — or if legislation akin to it passes — governments are going to advance these green tax incentives into the future.”
The Build Back Better Act passed in the Democratic-controlled House last year, but is currently held up in the evenly divided Senate by uniform opposition from Republicans and two moderate Democrats. Sen. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona have not yet lent their support to letting Democrats pass it through a budget reconciliation process with the help of a tie-breaking vote from Vice President Kamala Harris. The Biden administration is now hoping to pass at least some parts of the sprawling package, and Manchin has signaled openness to passing some of the tax provisions.
The electric vehicle tax credit currently has some limitations, but they vary depending on the battery capacity. “The base of the credit is $2,500 and it’s increased up to a maximum of $7,500 based on the battery power or the per kilowatt hour capacity of batteries in the vehicle,” said Christensen. “The more highly performing, fully electric vehicles get the full credit. The less performing hybrid vehicles will have less of a tax credit. The IRS provides a list of these qualifying vehicles and manufacturers, including the amount of the credit available for each model.”
For example, the 2021 Ford Mustang Mach-E is eligible for the full $7,500 credit, while owners of the 2021 Mitsubishi Outlander hybrid can claim a credit of $6,587. The BMW 330e, another hybrid, has a credit of $5,836.
Manufacturers are limited to selling 200,000 vehicles that can qualify for the credit. “The IRS maintains a running list of the vehicles that qualify for the credit and those that do not, but also the amount of vehicles sold by each manufacturer,” said Christensen. “Manufacturers are required to provide quarterly updates to the IRS on how many of the vehicles have been sold. After they hit that 200,000-vehicle limit, then the credit’s no longer available on that model. For example, Tesla and General Motors are completely phased out, meaning any electric vehicles sold by those manufacturers will not be eligible for the credit.”
Another limitation is that only vehicle owners can claim it. “You can’t lease the vehicle and receive the credit,” said Christensen. “The vehicle also has to be used in the United States, and the credit’s not refundable. What that means is in order for a taxpayer to take full advantage of the credit, they have to have income high enough to have federal tax in for at least the amount of the credit they want to take. So the credit does not carry forward or carry back. It is limited. However, under current law the amount of vehicles an individual purchases is not limited, so if you pay in enough federal tax to absorb three electric vehicle tax credits, you can go for that right now under current law. There are some proposed changes under Build Back Better and future law that would limit that.”
While the Build Back Better Act would limit that aspect of the tax credit, it could expand the credit in other ways.
“These credits aren’t going away, and they may even be more advantageous,” said Christensen. “For example, both the House and Senate versions of Build Back Better increased the credit to $12,500. Under both versions of the bill, they made that 200,000-vehicle manufacturer limit go away, meaning that manufacturers could sell more than that 200,000, which makes sense if we’re trying to go green and limit our carbon footprint. The other thing with both versions of the legislation is the credit is extended to used vehicles, so you don’t have to be the first owner of the vehicle. If you turn around and sell it, or you purchased it as a used vehicle, you could also take advantage of those credits. But the downside is this credit might be limited to one electric vehicle per person under the new legislation. That’s one limiting factor.”
On the residential side, the legislation incentivizes energy efficiency for homeowners with tax credits. “The residential energy efficiency property credit reminds me of the solar panel credit,” said Christensen. “It’s basically a 26% tax credit through 2022. It gets reduced in 2023 to 22%. It’s a percentage credit on the cost of the equipment used to reduce residential energy waste, so [it includes] technology upgrades to solar electric, solar hot water, home fuel cell technology, which is basically backup power generation, residential wind, geothermal heat pumps, and then biomass fuel properties, which is basically plant-derived fuel to heat your home, like a wood-burning device. If an individual taxpayer upgrades their residence to this type of technology, then they can get a 26% tax credit on the cost of that in 2022. It’s based on the cost incurred in the year.”
Like the electric car credit, it too comes with some limitations, however. “Sometimes what we’ve seen is someone may think they can lease solar panels from a company, but they would not be eligible for this credit if they lease,” said Christensen. “They have to actually own the property that they’re upgrading. Another common issue we’re finding is that someone may make payments on a payment plan for this kind of an upgrade to solar panels. The credit is limited to the cost incurred in that tax year, and it’s also limited to the principal amount, so it’s not the interest that may come along with the payment plan. Those are some things to think about with the residential efficiency property credit.”
The Build Back Better Act would extend and expand the tax credit, although there are some differences between the House and Senate versions. “Both the House and Senate versions want to extend the availability of this credit through 2031,” said Christensen. “Right now it expires in 2023 if it’s not extended. It does not seem to be a controversial topic in pending legislation, so it looks like if something eventually gets passed, this is one that’s going to stick around. They also want to increase the amount from 26% to 30% in both the House and Senate versions through 2031. Where these bills diverge is that the House wants to do something after 2031, and the Senate wants to do something different after 2031. It’s so far out, it’s kind of hard to predict, but I think that we can take solace that they both agree they want to increase the credit to 30% and they want to keep it through 2031.”
Another plus is that the solar panel credit will carry forward indefinitely if a taxpayer can’t use the full amount of the credit in a given year.
A related green tax credit for homeowners is the nonbusiness energy property credit for energy efficiency improvements to a principal residence. “This is a sort of residential home insulation credit,” said Christensen. “This nonbusiness property credit is a nonrefundable personal credit for improvements to a personal residence. It has to be an improvement placed in service before Jan. 1, 2022. Under current legislation, it does expire after 2021, but what I like about this credit is it can be used in tandem with the other credits, like the solar panel credit. This one is really available to do-it-yourselfers, those people who maybe are limited by the amount of funds they can invest in going green. It’s subject to a $500 lifetime limit. It’s essentially to insulate a residential property, making it more energy efficient so that heat isn’t lost to the outside elements. This credit includes replacing roof insulation, doors or windows, or upgrading a roof with a better grade material.”
The credit covers 10% of the cost of materials, she noted, but with inflation affecting the price of building materials, it may not go that far for many homeowners. “It’s easy to meet that $500, especially with the cost of materials nowadays,” said Christensen. “It’s a $500 lifetime limit, and it’s actually a $200 lifetime limit for windows.”
The Build Back Better Act would extend and expand this tax credit as well. “It’s one that is easy for people who don’t want to make that big investment,” said Christensen. “I’m sure a lot of people are just replacing windows and insulation and weather stripping, and that kind of thing can all qualify for that credit. With this one, the good news on the Build Back Better legislation is both the House and Senate versions extend this through 2031, and they actually want to increase the lifetime amount to $1,200. There’s really no controversy around this credit. It seems like if something is able to pass, this one’s going to stick around.”
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