The phrase “Federal Tax Credits” gets thrown around a lot in our industry, and we include the phrase in our promotions from time to time. While many people (including myself just a couple months ago) guess correctly that Federal Tax Credits are a good thing, they may not fully understand what Federal Tax Credits do exactly. This post will be my effort to explain it for those non-accountants out there.
Federal Tax Credits for Energy Efficiency
To make a long story short, the federal government has created incentives to encourage citizens to update their heating and cooling systems to more energy-efficient models. With more people running energy-efficient systems, less energy will be consumed, and, in turn, our country will be less dependent on natural resources. Also, since these systems are more efficient, they lower monthly energy bills for homeowners.
For homeowners who purchase a qualifying energy-efficient system for their home, the government offers a 30% Federal Tax Credit, up to $1,500.
What “a 30% Federal Tax Credit, up to $1,500″ Means and How It’s Different From a Tax Deduction
What this means is that if you spend $4,000 getting a new energy-efficient cooling system installed, you will receive a tax credit worth $1,200 (or 30% of $4,000). The tax credit lowers your federal income taxes by $1,200, which is essentially $1,200 back into your pocket. The tax credit goes up to a maximum of $1,500, which would be the credit from $5,000 spent on a new system.
A tax credit of $1,200 is more valuable than a $1,200 tax deduction. A $1,200 tax deduction lowers your taxable income by $1,200. Think of the deduction as $1,200 on which you don’t have to pay, say, a 35% income tax, or $420 ($1,200 x 0.35).
$1,200 tax credit = $1,200 off of your taxes payable = $1,200 in your pocket
$1,200 tax deduction = about $420 off of your taxes paid = $420 in your pocket
That’s Not All
The tax credit is not the only benefit of upgrading to an energy efficient system:
- Your energy bills will be lower thanks to the efficiency of your new system, and
- Consuming less energy is better for the environment, so you’ll feel better about your smaller carbon footprint.
As always, feel free to call us at 1-(866)-Duck-Truck. We’re happy to explain it further and show you the products and services we offer that qualify for the tax credit.