Dear Tax Guy,
I just bought a used electric vehicle, so now I’d like to install a solar array to offset the additional electricity use.
My tax liability for 2023 will be enough to get full benefit of the used EV tax credit or the (guesstimated) solar tax credit. But not enough for both.
If I claim both for 2023, will the IRS apply the EV credit first and let me roll over the solar credit to 2024? Or will it apply the solar credit first, which means I get nothing for the EV credit since it doesn’t roll over?
If the latter I’ll simply wait to install the solar system until 2024.
Navigating new tax credits
Dear Navigating,
It’s been more than half a year since Congress passed new clean-energy tax credits and revamped existing ones in the Inflation Reduction Act, but the fine print is still getting worked out. Other simplifying steps are still far off.
Example: The Treasury Department just released proposed rules on the mineral and battery part requirements so drivers can get the full $7,500 tax credit on a new electric vehicle. The proposal has staunch critics, like Sen. Joe Manchin of West Virginia. The centrist Democrat voted for the Inflation Reduction Act, but says the ensuing regulations are ceding too much to overseas manufacturers.
Another example: We’re still a year away from being able to transfer the EV credits at the point of sale to the car dealer instead of claiming the credit on a tax return.
So it’s your lucky day that your particular puzzlement has a clear cut answer so soon, one expert tells me. Claim the used EV credit first and plan to hold off on some or all of the solar tax credit, which can carry forward, he noted.
I’ll return to the reasoning. First, here’s a roadmap on how I got here.
The Inflation Reduction Act is overhauling the rules on tax credits for new EVs. It’s also introduced a new tax credit to incentivize purchases of used EVs.
As of January 2023, previously-used EVs and fuel cell vehicles qualify for a tax credit that’s 30% of the sales price and it pays up to $4,000.
There are strong hints that drivers are taking notice.
During the first quarter, dealers sold 42,753 used EVs, according to Cox Automotive. That’s a 32% increase year-over-year, according data from the company, which owns brands like Kelley Blue Book. In the first quarter, used EVs had an average retail listing price around $43,400 while new EVs listed close to $59,000, Cox Automotive data showed.
The IRS has eligibility rules for the used EVs, including a $25,000 price cap.
There are eligibility rules for the buyers, like an income limitation of $75,000 for single filers and $150,000 for married couples filing jointly. (Match your income either to the year the vehicle was placed in service or the year before that, the IRS says.)
The Inflation Reduction Act also wants more people to run their homes on renewable energy, so it’s revamping the tax rules there. The Residential Clean Energy Credit that you’re eyeing for the solar panels is worth 30% of the costs.
The credits for the used EVs and the solar panels are both non-refundable.
Time to shift the tax tactics into a higher gear. Tax credits reduce tax liability. When credits shrink a tax bill to $0, the excess becomes refund money if it’s a refundable credit. If the credit is non-refundable and tax liability falls to $0, there’s nothing else to gain.
Your guess is you have enough tax liability for just one of the two credits to sufficiently shrink your bill. Claiming both would deprive you of the tax incentives that lawmakers were driving at.
The used EV credit can’t be carried forward to apply in a later tax year, according to the IRS.
However, the tax benefit connected to solar panels can be carried forward, according to David Camerucci, senior manager, sustainability tax and incentives at EY.
The law’s wording says if there’s an unused credit, the “excess shall be carried to the succeeding taxable year.” Elsewhere, the IRS notes, “You can carry forward any excess unused credit, though, and apply it to reduce the tax you owe in future years.”
The route is straightforward: Claim the credit that can’t apply in the future and wait to take advantage of the one that can carry forward.
For all the ways you could have wondered what to do next, Camerucci says you “picked a new credit that has good clarification to it and an existing credit with limited changes.”
One more thing before you drive off to a solar panel contractor.
These credits begin applying when panels are “placed in service, which generally means available and ready for use,” Camerucci noted. That’s after the permitting, the installation, and it’s typically after money changes hands too, he said.
So even if you want to move quickly, a slow path to service might make 2024 the earliest you could claim the Residential Clean Energy Credit at all. Some states might have their own financial incentives like a rebate that nudges homeowners to solar power. Public utilities may likely have programs too.
Check what applies where you live and check how that mixes with IRS rules. The programs may or may not subtract from what counts as qualified expenses under the credit.
It all depends on the facts and circumstances. Even if one part of your green-energy-powered path forward seems clear, you can never drive too far from tax code murkiness.
Got a tax question? Write me at: [email protected]
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.