HOT for Refunds – But Don’t Get Burned by the Residential Energy Tax Credit
We talked with tax return preparers around Chicago, Houston, Orlando, and Maryland. Some of them love this tax credit to boost refunds for their customers. But others stay away, because often the credit is being used illegally, and is creating refund problems.
What Do You Know About the Residential Energy Tax Credit?
Most people think it sounds like something created for wealthy folks with solar panels on their mansions, or charging stations for their electric vehicles.
But here’s the good news: this credit isn’t just for the rich – or even the top 10%. It’s for regular, hard-working taxpayers, like you and me. We all appreciate a lower electric bill. And for those of you lucky enough to receive a tax refund, who wouldn’t want a little extra refund this tax season?
So, what’s the big deal about this residential energy tax credit? This tax credit is refundable. This means that it will reduce, or even fully pay your overall tax liability, and the remainder can be refunded to you.
You might qualify if you have installed certain energy-efficient upgrades to your home. These are items like solar panels, energy-efficient windows, or a heat pump.
And we’re not talking about pennies here. Depending on the upgrades, the credit can cover 30% of your qualifying expenses. Some of those expenses allow a lifetime credit limit of up to $1,200. Other expenses like heat pumps, biomass stoves, and boilers have a separate $2,000 annual credit limit. Again, that can be an annual credit, without a lifetime limit.
Each category of expenses has its credit requirements and limits, including the:
Residential Clean Energy Credit
Energy Efficient Home Improvement Credit
Here are some of the requirements. To qualify for this credit:
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The improvements must meet specific energy efficiency standards.
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Any improvements must be made in your primary residence. Sorry, but there’s no tax credit for the backyard she-shed, or your “getaway” house).
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Remember, the credits have limits.
You should only claim this credit if you qualify. Like most tax benefits, the credit is granted using the “honor system”. That means you are expected to be honest.
(Not everyone is honest.)
HOT for Refunds Tax Credit, IRS Tax Attorney (Naperville IL)
What Happens if I Take the Credit Anyway?
Let’s imagine that you have no expenses that qualify for the credit. Still, your return preparer gets “creative” on your tax return, and claims the credit without you qualifying for it.
Remember the famous last words: “What’s the worst that could happen?”
The IRS is auditing for this very item. This aggressive IRS action is because the credit has been widely abused. There are lots of poorly trained return preparers who use tricks like “tax software glitches” and “carryover credits” to illegally boost their customers’ refunds by thousands.
(You, as the customer, pay extra for this, by the way!)
If the IRS catches you, these are the likely consequences:
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You will certainly lose the credit. This means that you must repay the full amount of the credit granted, not just the refund received.
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You will pay interest and The penalties can be 20% of the credit amount. In some more extreme cases, the IRS may charge a 75% penalty.
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You are not likely to be arrested. (However, any return preparer who willfully abuses this credit could certainly be arrested, convicted, and imprisoned.)
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However, the IRS may expand its audit of your taxes. IRS would look at every item on your tax return, and even expand to other years.
How to Protect Yourself