What is an Energy Tax Credit?

Mary McMahon

An energy tax credit is a tax incentive for investing in energy efficiency. People qualify for an energy tax credit by purchasing particular products or engaging in certain types of activities, like weatherizing a home. People who qualify receive a credit against taxes paid or due, reducing the amount of money they owe in taxes. This is distinct from a tax deduction, where people are allowed to deduct a certain sum from their total taxable income, reducing tax liability and causing the final tax bill to be smaller.

Installing solar panels on a home or other building may result in an energy tax credit.
Installing solar panels on a home or other building may result in an energy tax credit.

Energy tax credits are used by governments to encourage citizens and companies to buy energy efficient equipment and take other steps to improve efficiency. By providing a credit, the government hopes that people will make purchases they might not have otherwise considered, stimulating the energy efficiency industry while also leading to improved home and business efficiency by replacing inefficient systems and getting buildings more up to date. More efficiency reduces demand on utilities, lowers pollution, and decreases reliance on non-renewable sources of energy.

Installing a wind turbine could quality someone for an energy tax credit.
Installing a wind turbine could quality someone for an energy tax credit.

Types of purchases qualifying for an energy tax credit vary. It is a good idea to consult an accountant to get information about available credits and how to qualify. Generally, things like energy efficient cars and appliances may qualify, along with things like replacing windows and fixtures, insulating, and taking other steps to weatherize a structure to lower energy usage. People must be able to document their expenses with receipts and proof of work, in the case of weatherizing initiatives. Things like installing solar panels or wind turbines can also qualify people for an energy tax credit.

These types of tax credits are often available to individuals and businesses. Companies that sell and install energy efficient equipment may offer promotions to customers to encourage them to make purchases, using the energy tax credit as an incentive. Sometimes governments may also work with merchants to create programs where people exchange old and inefficient appliances for newer, more energy-efficient ones. Refrigerators, water heaters, and laundry equipment are common targets for such programs.

People interested in taking advantage of an energy tax credit should be able to find a listing of available tax credits through a tax agency or accountant. It is important to take note of any restrictions such as deadlines on purchases. In some cases, it may be possible to take a retroactive credit, depending on how a credit is structured. If a taxpayer made a purchase to improve efficiency in a prior year without being aware of a tax credit, it is advisable to ask an accountant about the possibility of claiming the purchase now.

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