As we are living in a new tax world now there are some ways we have to know to save income tax. Do you want to know some of the methods to save it? If you follow the methods you will be considered smart. An overhaul was passed by Congress last year. Many new ones got introduced so it is time to focus on tax savings. One of the best ways to save tax is by setting money aside in the tax-deferred account. You can trim the income so it can fall into the lower tax bracket.
Hence if your employer is offering a tax-deferred program like a 401(k) then ensure whether you are participating in it. Also, you can put the amount of money you can. If you are managing your own business you will get many choices of tax-favoured retirement accounts like the Simplified Employee Pensions (SEPs) and individual 401(k)s. The contributions can cut the tax bill and the earnings will grow tax-deferred for retirement. Here find out all the details to save Solar Tax Credit (Investment Tax credit) and income taxes.
What is Solar Tax Credit?
The tax credit is a reduction for dollars in the income tax amount you are required to owe. For instance, claiming a $1,000 federal tax credit decreased the federal income tax which is due by $1,000. Hence the federal income credit is referred to as Investment Tax Credit or ITC. But it is different from the ITC offered to solar systems.
Do you want to know what federal solar tax credit is? It is a tax credit that can be claimed on the federal income taxes. It is calculated based on the percentage of the cost of a solar photovoltaic (PV) system. Other kinds of non-renewable sources are also suitable for similar credits.
This system has to be placed in service at the time of tax year. It also has to generate electricity in the United States. In December 2020 congress passed the extension of the ITC. It offers a 26% tax credit for systems installed from 2020-to 2022 and 22% for systems installed in 2023. The tax credits expire in 2024 and there is no minimum amount that can be claimed.
Are you eligible to claim the federal solar tax credit?
You can be eligible for the tax credit if you meet all the below criteria.
- The solar PV system has to be installed between January 1, 2006, and December 31, 2023.
- The solar PV system has to be located in the primary or secondary house in the United States. Or it has to be present in the off-site community solar project. Also if the electricity generated is not credited for and is not exceeding your electricity consumption. The IRS has permitted the taxpayer to claim a section 25D tax credit.
- The solar system has to belong to you. You must have purchased it with cash or through financing. But you have to not lease nor make an arrangement to buy electricity generated by a system.
- The solar system is new or you are using it for the first time. The credit can only be claimed on the “original installation” of the equipment.
What are the incentives you receive for the federal tax credit?
1. To get a rebate on the electricity utility to install solar
The subsidies offered by the utility to you for installing solar PV systems are not included in the income taxes through an exemption in federal law. If this is the case the utility rebate for installing solar gets deducted from the system costs before calculating the tax credit.
2. Payment for renewable energy certificates
If the utility or the other buyer offers you cash in exchange for renewable energy certificates. The payment will be considered as the taxable income. The payment will raise the gross income and it will not reduce federal solar tax credit.
3. Rebate form state government
The rebates from the statement governments do not decrease the federal tax credit.
4. State tax credit
The state tax credits for installing Solar PV decreases federal tax credits. If you get state tax credit the taxable income you add to the federal taxes will be more than it should be. It is because you have less state income tax to deduct.
What to do if you are not a homeowner?
You do not need to be a homeowner to claim the tax credit. The tenant-stockholder at cooperative Housing Corporation still qualifies for the tax credit. They have to contribute to the expenses of the solar PV system. The money you spend for the cost of the solar system is the amount you have to calculate for the tax credit. But you cannot claim the tax credit if you are a renter. The landlord installs the solar system and you have to be the owner of the system to claim the tax credit.
What to do if you have installed solar PV on a vacation home in the US?
The solar PV does not need to be installed on the primary residence in the US for you to claim the tax credit. But the residential federal solar tax credit may not be claimed when you put a solar PV system on the rental unit. It will be eligible for business ITC under the IRC section 48.
Have you financed your Solar PV system instead of paying for it?
If you have financed the system with the seller of the system then you are obligated to pay the full cost of the system. You can claim the solar tax credit on the full cost of the system. The expenses such as financing, origination fees, and extended warranty expenses do not qualify for calculating your tax credit.
Also read: Rich Dad Poor Dad Book Review
Steps to save the income taxes
1. Tap into the IRA
The individual retirement accounts are straightforward. These are easily accessible ways to save the taxes like the 401(k) does. But remember there are some strict rules. If you are not taking part in a workplace retirement plan you can give $5,500. But if you have a plan at work then the deduction will be limited. It all depends on the income.
2. Benefit from the health savings account
If your workplace is offering an insurance plan then you can combine Health Savings Account with it. Or you can also open one and buy your coverage. The health savings account will help you to put money pre-tax with a wide range of medical bills like deductibles, co-pays and other medical expenses. It will help because vision and dental care are not covered by insurance. The HSA can offer a triple tax break. So the money you put may escape the taxes like federal income, no state or local taxes and no FICA.
3. Use a flexible savings account
The flexible savings account is like HSA’s little brother. It is only present through employer-sponsored healthcare plans. The FSA helps you to keep money aside before the tax for up to $2,550 a year for the health costs like deductibles. But unlike in HSA, the funds do not belong to your directly. If you do not spend them before the end of a year it could go back to the employer. But many companies offer grace periods too for you to spend the money.
4. Giving the money away
If you want to offer money for charity then you can think about giving away appreciated stocks or mutual fund shares. You must have owned it for more than a year instead of cash. It will supercharge the saving power of your generous offer for charity. The charitable contribution deduction is a fair market value of the securities on the date you offered the gift. It does not apply to the amount you paid for the asset. Also, you must not pay tax on the profit. But it is not a good idea to donate stocks and share funds that are unprofitable. It is better to sell the asset and claim the loss on taxes and give away cash to the charity.
5. Collect tax credits for the good works
You can get some benefits while doing good work. For instance, you can keep a record of what you spent on a charity. You can track what you spent on stamps for a fundraiser, ingredients you brought for a home and more. Then add the costs to your cash contributions and know about your charitable contribution deduction. To claim these you got to itemize your taxes.
6. Start a business you planned
The tax reform has added a good incentive for people who want to start a business. The sole proprietors who use Schedule C, and also others like S corporations, partnerships and LLCs can pass their income for tax and deduct 20% of their qualifying income before the tax bill under the new tax law. But there are some limitations to which you have to know about. The tax deductions are subject to their income.
7. Setting up a home office
If you are using part of your home for your business then you can opt for the deductions of home-office expenses. Many home operators are afraid of such breaks because of audits. But the IRS has made it easy to claim the tax break. Rather than calculating the individual expenses, you can try to claim the standard deduction of $5 for every square foot.
8. Try to go green
You can save income tax by going green. There is a tax credit available for people who install alternative energy equipment. The tax credit is equal to 30 per cent of what the homeowner has to spend on systems like solar electric systems, solar water heaters, wind turbines, geothermal heat pumps and more. For this tax credit, there is no cap.
9. Caring for someone
For taking care of a child you may have to spend $7,500 or more. But when you use a child care reimbursement account at work then you can pay those bills. With this, you can save one third or more costs as you can avoid income and Social Security taxes. If your work offers this plan you can benefit from it.
If you have a relative who is physically ill then you can use this benefit to take care of them too. It covers the costs you spend on beneficiaries of special needs. So save your income tax with this plan.
10. Avoid double taxation on the investment earnings
Are your mutual fund dividends reinvested in extra shares? Then you have to know that each reinvestment increases the tax basis in the fund. In turn, it reduces taxable capital gain if you get shares in a taxable account. If you forget to include the reinvested dividends it can lead to double taxation. They are paid once a year and reinvested and included in the proceeds of the sale. So do not make the mistake that can result in unnecessary expenses.
11. Use tax-free bonds
It is easy to see whether you can come out with taxable or tax-free bonds. To find the taxable-equivalent yield you have to divide the tax-free yield by 1 minus your federal tax bracket. You also must not overlook the state tax savings. For people living in high tax states like New York and California, you can make use of tax-favoured bond mutual funds. From the federal and state income tax the pay-out interest is free.
12. Education tax breaks
You can ask your company whether they are willing to pay for your improvement. Many companies can offer their employees up to $5,250 for their educational development tax-free. It means your boss will pay the bill but the amount will not show up in the w-2. The course you take to improve yourself need not be only job-related as graduate-level courses can also qualify for the tax breaks.
Conclusion
These are the ways that will help you to save income tax in the USA. Everybody should pay the tax. But these methods will help you to save some money which is necessary for you. So follow the steps as they work.
Also read: Guide to New Jersey Home Solar Incentives & Solar Rebates
