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How to take advantage of federal tax credits

Keep your overall tax situation in mind

Vicky Volvovski
June 4, 2024

A woman prepares her taxes

There are lots of tax incentives available from the federal and state government for clean, climate friendly technologies.

In order to take advantage of tax credits, you must first owe taxes. Tax credits are applied against the amount of tax you owe, reducing your tax liability dollar-for-dollar. This means that the more tax you owe, the more valuable the tax credit becomes.

For example, let's say that you owe $1,000 in federal income taxes, and you are eligible for a $500 tax credit. If you claim the credit, your tax liability would be reduced to $500 ($1,000 - $500). In this way, tax credits can significantly reduce the amount of tax owed and increase your refund.

However, if you do not owe any taxes, you will not be able to take advantage of the tax credit. Tax credits are only applied against the amount of tax owed and cannot be used to create a tax refund. If your tax liability is zero, a tax credit will not provide any additional benefits.

Note that some tax credits, specifically for rooftop solar and home battery systems, roll over. This means that even if you don't have enough of a liability this year, you can claim the remaining amount next year. Other tax credits, like those for heat pumps or heat pump water heaters do not roll over. If you do not have enough of a liability in the year you do the work, you will loose the tax credit.

It is important to understand your tax situation and any credits for which you may be eligible. By working with a tax professional or using tax preparation software, you can determine the best way to maximize the benefits of tax credits and reduce your tax liability.

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