Tax credits for solar panel installation are very popular in the sunny Florida Panhandle. The Residential Energy Efficient Property (REEP) Credit offsets the expense of a solar improvement to residential property and may be claimed using IRS form 5695. It is important to understand how this valuable credit functions before committing to the hefty price of solar panels.
First, panels must be installed on a home that the taxpayer uses as a personal residence. It does not need to be a primary residence, but if it is used as a rental property for any part of the year, then the credit may be disallowed or reduced.
Second, the instructions for claiming the credit clearly state that the costs are treated as paid when the original installation of the item is complete or when the original use of a newly constructed or reconstructed home begins. This is critical information because panels installed by Dec. 31, 2019, qualify for a credit up to 30% of the purchase price but installations in 2020 qualify for only 26%. In 2021, the credit will further decrease to 22% before phasing out in 2022. Also, only taxpayers who purchase solar panels may take a credit for their costs. A lease arrangement is not considered a purchase.
Finally, the least discussed part of the REEP credit seems to be its limitation which is based on an individual’s tax liability. This means that the maximum amount of the credit that can be claimed on a return is equal to the amount of federal taxes levied on the taxpayer’s income. Consulting with a tax professional about your unique situation prior to this major purchase can prepare you for the likelihood that you may file a return and receive only a portion of the total allowable credit.
The good news is that the unused credit will carry-over, but the taxpayer will need to retain documentation for future filing. Taxpayers should also retain information relating to the solar panels (such as purchase costs, date of installation and any credit claimed) for future use in determining their basis in the home when converting to a rental or selling the property.
Another common concern in our community is the taxability of reimbursements for military PCS moves. The Tax Cuts and Jobs Act of 2018 limited deductions for moving expenses to members of the Armed Forces who are required to move due to active duty orders. Military members will need to look in their MyPay accounts for a second W-2 that includes reimbursements for moving expenses. While a code P in box 12 will indicate what portion of the reimbursement may be nontaxable, it is up to the service member to properly complete IRS form 3903 to deduct their qualified expenses. Not all military reimbursements are considered a qualified expense by the IRS, but a skilled tax professional can help clarify these limitations.
Popular apps like Robinhood and Acorns are making it easier for taxpayers to buy and sell investments and even exchange virtual currencies. Taxpayers should be mindful that these transactions may be reportable on their individual income tax return regardless of whether they realize a gain. Consolidated form 1099s are released around mid-February and contain a lot of valuable information to properly report taxable activity. These statements may require the completion of multiple IRS forms to properly account for interest, dividends, investment expenses, miscellaneous income and capital gains/losses.
A little tax planning can reap measurable savings in retirement. While seniors who have diligently invested in retirement accounts are now able to access those funds without penalty, it is important to factor in any taxes that may be levied on this income. It can be tempting to withdraw funds for a bucket list travel opportunity or a long-awaited home renovation but taking a single, large distribution may generate a higher tax liability than taking smaller distributions spread across tax years. Retirement account distributions can also affect the taxability of Social Security income and withholding may need to be adjusted to avoid tax penalties. H&R Block Navarre is open year-round to assist clients in understanding how their financial decisions may impact their tax liability.
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