Month: June 2024

Home Improvements and Home Energy Credits

With summer on our doorstep, the thoughts of many people go to home improvements that should be done now that the weather is improving. If this sounds like you, you should be aware that certain energy efficient updates to your home could qualify you for home energy credits.

What you need to know

You can claim the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit for the year that qualifying expenditures are made.

Homeowners who improve their primary residence will find the most opportunities to claim a credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences. Landlords cannot claim this credit.

Energy Efficient Home Improvement Credit

If you make qualified energy-efficient improvements to your home after Jan. 1, 2023, you may qualify for a tax credit up to $3,200.

As part of the Inflation Reduction Act, beginning Jan. 1, 2023, the credit equals 30% of certain qualified expenses:

  • Qualified energy efficiency improvements installed during the year which can include things like:
    • Exterior doors, windows and skylights.
    • Insulation and air sealing materials or systems.
  • Residential energy property expenses such as:
    • Natural gas, propane or oil water heaters.
    • Natural gas, propane or oil furnaces and hot water boilers.
  • Heat pumps, water heaters, biomass stoves and boilers.
  • Home energy audits of a main home.

The maximum credit that can be claimed each year is:

  • $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150).
  • $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

The credit is nonrefundable which means you cannot get back more from the credit than you owe in taxes and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

If you invest in energy improvements for your main home, including solar, wind, geothermal, fuel cells or battery storage, you may qualify for an annual residential clean energy tax credit.

The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for a home in the United States installed anytime from 2022 through 2032.

Qualified expenses include the costs of new, clean energy equipment including:

  • Solar electric panels.
  • Solar water heaters.
  • Wind turbines.
  • Geothermal heat pumps.
  • Fuel cells.
  • Battery storage technology (beginning in 2023).

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

  • Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
  • Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
  • Battery storage technology must have a capacity of at least 3 kilowatt hours.

This credit has no annual or lifetime dollar limit except for fuel cell property. You can claim this credit every year you install eligible property on or after Jan. 1, 2023, and before Jan. 1, 2033.

This is a nonrefundable credit, which means the credit amount received cannot exceed the amount you owe in tax. You can carry forward excess unused credit and apply it to any tax owed in future years.

Changes to Form W-2 Reporting

If you’re a business owner, you should be aware that the SECURE 2.0 Act has changed how some amounts are reported on Form W-2. The provisions potentially affecting Forms W-2 (including Forms W-2AS, W-2GU and W-2VI) are:

  • De minimis financial incentives,
  • Roth Savings Incentive Match Plan for Employees (SIMPLE) and Roth Simplified Employee Pension (SEP) Individual Retirement Arrangements (IRAs), and
  • Optional treatment of employer nonelective or matching contributions as Roth contributions.

De minimis financial incentives

The SECURE 2.0 Act made changes designed to encourage employees to contribute to their employers’ 401(k) or 403(b) plans. These changes allow employers to offer small financial incentives to employees who choose to participate in these retirement savings arrangements. If an employer offers such an incentive, it’s considered part of the employee’s income and is subject to regular tax withholding unless there’s a specific exemption.

Roth SIMPLE and Roth SEP IRAs

Under SECURE 2.0 Act, an employer that maintains a SEP or SIMPLE IRA plan can offer participating employees the option of having their salary reduction contributions deposited in a Roth IRA instead of a traditional IRA. Contributions made at the employee’s election to a Roth SEP or Roth SIMPLE IRA are subject to federal income tax withholding, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). These contributions should be included in boxes 1, 3 and 5 (or box 14 for railroad retirement taxes) of Form W-2. They’ll also be reported in box 12 with code F (for a SEP) or code S (for a SIMPLE IRA).

Employer contributions to a Roth SEP or Roth SIMPLE IRA are not subject to withholding for federal income tax, FICA or FUTA. These contributions should be reported on Form 1099-R for the year in which they’re allocated to the individual’s account. The total amount should be listed in boxes 1 and 2a of Form 1099-R with code 2 or 7 in box 7, and the IRA/SEP/SIMPLE checkbox checked.

Designated Roth nonelective contributions and designated Roth matching contributions

Under the SECURE 2.0 Act, plans can allow employees to designate certain matching and nonelective contributions made after Dec. 29, 2022, as Roth contributions. These contributions are not subject to withholding for federal income tax, Social Security or Medicare tax.

Unlike regular Roth contributions, designated Roth nonelective and matching contributions must be reported on Form 1099-R for the year in which they’re allocated to an individual’s account. They’re reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.

Reminder

Forms W-2 have been updated for tax year 2023 (filed in 2024). If a business has already filed 2023 Forms W-2 without following these new guidelines, they may need to file Form W-2c to correct any errors. Refer to the General Instructions for Forms W-2 and W-3 for details on when and how to file Form W-2c.

If you need help understanding how these new rules will affect your business, please contact our office. We would be happy to help.

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