August 10, 2021
Energy Tax Credit for Homeowners
For 2021, homeowners may be able to take a tax credit of 26% of the costs of qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property. The credit remains at 26% of the qualifying costs for systems installed in 2022 but will decrease to 22% for systems installed in 2023. The tax credit expires starting in 2024 unless Congress renews it.
Among the list of qualified properties for the credit, “solar tax credit” has gained popularity. This tax credit is to incentivize the use of alternate energy sources by providing a credit based on the costs to install a solar photovoltaic (PV) system (commonly known as “solar panels”). For solar electric property, there is no limit to the value of the credit. (See below for a lifetime limit on other energy efficient improvements eligible for energy tax credit.)
There are also tax incentives for qualified energy efficient improvements. An individual may claim a credit for (1) 10% of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year. In 2018, 2019, 2020, and 2021, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows).
Qualified energy efficiency improvements include the following:
- Energy-efficient exterior windows, doors and skylights
- Roofs (metal and asphalt) and roof products
- Insulation
Residential energy property expenditures include the following:
- Energy-efficient heating and air conditioning systems
- Water heaters (natural gas, propane or oil)
- Biomass stoves (qualified biomass fuel property expenditures paid or incurred in taxable years beginning after December 31, 2020, are now part of the residential energy efficient property credit for alternative energy equipment.)
More information on the qualifying products is available at the Energy Star website.
2021 Recovery Rebate Credit
Since early this year, the Third Economic Impact Payment (“EIP3,” commonly known as the 3rd “Stimulus check”) has been made available to eligible Americans as an advance payment of a new tax credit called Recovery Rebate Credit. The EIP3 amount is (1) $1,400 for each eligible individual with a valid social security number ($2,800 for a married joint filers if both spouses are eligible), plus (2) $1,400 for each qualifying dependent with a valid social security number or an Adoption Taxpayer Identification Number (“ATIN”).[1]
Eligibility for the EIP3 is different from the two previous ones. Generally, the full amount of the third EIP3 is available for a taxpayer who:
- Is a U.S. citizen or U.S. resident alien (and his/her spouse if filing a joint return);
- Is not a dependent of another taxpayer; and,
- His or her adjusted gross income (AGI) is not more than:
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
- $112,500 if filing as head of household; or,
- $75,000 for eligible individuals using any other filing status.
Payments will be phased out (reduced) for the taxpayers above those AGI amounts. This means there will be no EIP3 if a taxpayer’s AGI is at least $160,000 if married and filing a joint return, or if filing as a qualifying widow or widower; $120,000 if filing as head of household; or, $80,000 for eligible individuals using any other filing status.
This EIP3, like the previous two, is available for US expatriates (expats) who live overseas if the requirements are met. U.S. expats who claim the Foreign Earned Income Exclusion may be in a more advantageous position because the AGI is reduced by the exclusion.
Reconciliation of the EIP receipt is important to ensure the taxpayer received the full payment to which he or she was entitled. If a taxpayer was entitled to but did not receive EIP3, that amount should be claimed on the taxpayer’s 2021 federal tax return. Some taxpayers eligible for EIPs may have not received payment because their AGI was higher on the prior year tax return. Some U.S. expats may have not received the EIPs they are entitled to because they have not filed U.S. tax returns, or changes or errors occurred with foreign mailing addresses. All taxpayers who believe the IRS mailed a check for the EIP3 but never received it should trace the payment.[2]
Child Tax Credit
For 2021, American families with qualifying children may receive up to $3,000 per child between the ages of 6 and 17 at the end of 2021, and $3,600 per child under age 6. Essentially, the existing Child Tax Credit amounts were increased by $1,000 per child between ages 6 and 17; $1,600 per child under 6. This credit is subject to phase-out for incomes over $150,000 for married joint filers and qualifying widows/widowers, $112,500 for heads or household, and $75,000 for all other taxpayers. The Child Tax Credit is fully refundable for 2021.
Beginning July 2021, the IRS scheduled monthly advance payments of the 2021 Child Tax Credit through December 2021 for up to 50% of the expected Child Tax Credit. If your 2021 income will be higher than 2019/2020, over the phase-out amounts, you may want to decline this advance payment because you may need to repay some or all the advance payments when filing the 2021 tax return next year.
For more information, please refer to our July blog post, Child Tax Credit Changes: Weight the Benefits vs. Impact on your Tax Liability.
Credit for Adoption Expenses
For 2021, a tax credit is available up to $14,440 for the expenses you paid for each child you adopt. Families who finalized the adoption of a child with special needs in 2021 and fulfill the eligibility requirements can claim the full credit of $14,400, regardless of whether they had any expenses. The credit begins to reduce for taxpayers whose income is $216,600 and no credit is available once the income reaches $256,660.
Child and Dependent Care Tax Credit
For 2021 only (so far), the American Rescue Plan Act greatly expanded the existing Child and Dependent Care Tax Credit. Taxpayers with children under age 13 may take advantage of the Child and Dependent Care Tax Credit, and the amounts of available credit, eligible expenses, and income limits have increased significantly. Generally, this credit is not available for married separate filers.
Eligible expenses are “work-related” expenses which include (but are not limited to) day care, nursery school, before- and after-school care, and summer camp expenses you paid so you could work or actively look for work. New for 2021, the eligible work-related expenses also include the amounts a taxpayer pays to his or her mother or other relatives, unless they can be the taxpayer’s dependent.[3] A taxpayer also counts work-related payments he or she makes to other relatives, even if they live in the taxpayer’s house.[4]
The credit is 50% of the qualifying “work-related” expenses. The maximum amount of work-related expenses for purposes of the credit is $8,000 if a taxpayer has one qualifying person, and $16,000 if a taxpayer has two or more qualifying persons. This means that the maximum total amount of the credit is $4,000 (50% of $8,000) for a taxpayer with one qualifying person, and $8,000 (50% of $16,000) for a taxpayer with two or more qualifying persons. The credit is fully refundable for 2021 if a taxpayer’s principal residence is in one of the 50 states or the District of Columbia for more than one half of 2021.
This credit is available to U.S. expats who live overseas, but the credit is refundable only if a taxpayer’s principal residence in one of the 50 states or the District of Columbia for more than half of the tax year. However, U.S. military personnel who are stationed outside the United States on extended active duty are considered eligible for the refundable portion of the credit.
Tax Credit for New All-Electric and Plug-in Hybrid Vehicles and Electric Vehicle Charging Station
All-electric and plug-in hybrid cars purchased new in 2021 may be eligible for a federal income tax credit of up to $7,500. The credit amount will vary based on the capacity of the battery used to power the vehicle, and it begins to phase out for a manufacturer’s vehicles when the cumulative sales in the U.S. reach at least 200,000 qualifying vehicles manufactured by that manufacturer. The list of qualifying vehicles is available at the IRS website at https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit. The credit is not refundable, which means any excess credit over the tax liability will be lost. In addition to the federal tax credit, you may benefit from your state or local incentives which can be found at https://afdc.energy.gov/laws/state.
Furthermore, a tax credit is also available for the costs associated with an electric vehicle (EV) charging station. The federal tax credit for an EV charging station at your primary residence is 30% of the cost, up to $1,000. This credit is claimed on Form 8911, Alternative Fuel Vehicle Refueling Property Credit. State or local incentives may be available for the cost of charging station installation as well.
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For more information on tax planning strategies, read additional articles from our 2021 Year-End Tax Planning Series.
[1] An ATIN is an Adoption Taxpayer Identification Number issued by the Internal Revenue Service as a temporary taxpayer identification number for the child in a domestic adoption where the adopting taxpayers do not have and/or are unable to obtain the child’s Social Security Number (SSN). For more information, please visit https://www.irs.gov/individuals/adoption-taxpayer-identification-number#QA1
[2] Taxpayers may be able to trace refund payments by contacting the IRS automated system, or by completing Form 3911. For more information, please visit https://www.irs.gov/faqs/irs-procedures/refund-inquiries/refund-inquiries-0 .
[3] However, if a taxpayer pays parents or relatives such work-related expenses, and the taxpayer claims the payment for the Child and Dependent Care Credit, those amounts will probably have to be included as taxable income on the parents or relatives who receive the payments. See IRS Frequently Asked Questions #17, added June 11, 2021. https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs
[4] At this time, household employee consequences are not yet clarified on this point. See IRS Frequently Asked Questions #17, added June 11, 2021. https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs
