Tax Credit Options for Large Purchases
The IRS provides several tax credit options for large purchases. They include the Electric Vehicle (EV) Tax Credit, the Energy Efficient Home Improvement Credit, the Residential Energy Credit, and the Sales Tax Deduction for Major Purchases, a provision not conforming to the established credit principle.
The Electric Vehicle (EV) Credit has an upper limit of $7,500 for new electric vehicles. The vehicle must meet specific criteria for battery requirements ($3,750 credit if a certain percentage of the car’s critical battery minerals are sourced from the U.S or countries with a free-trade agreement with the U.S. and an additional $3,750 if a certain percentage of battery components are manufactured or assembled in the same roster of countries,) price cap ($55,000 for cars and $80,000 for SUVs, trucks, and vans,) and final assembly location. In addition, there are adjusted gross income (AGI) upper limits for eligibility, $300,000 for married couples filing jointly or qualifying spouse, $225,000 for a head of household, and $150,000 for all others.
Used electric vehicles have an upper credit of $4,000. The vehicle must be at least two years old, have a price cap of $25,000, and purchased from a dealer. To qualify the taxpayer must have an adjusted gross income of $75,000 for single filers and $150,000 for joint filers.
Lessors of electric vehicles can claim up to $7,500 per vehicle regardless of the locale of the final assembly, battery sourcing, and vehicle pricing.
The Energy-Efficient Home Improvements Credit, a nonrefundable credit, is designed to encourage homeowners to make energy-efficient upgrades to their homes. The credit allows $1,200 for energy-efficient property costs and certain home improvements and $2,000 for qualified heat pumps, water heaters, biomass stoves, or biomass boilers. Eligible improvements include building envelope components, such as exterior doors, windows and skylights, and insulation materials; home energy audits, qualified energy properties, such as heat pumps, water heaters, and biomass stoves or boilers. To qualify for the credit the components must be produced by a qualified manufacturer, and the taxpayer must report the PIN for the item on their tax return; the improvements must be made to the primary home; and the credit is available for properties used chiefly as a residence and not for business use in which case the credit is based on the share of the expenses allocated to non-business use.
The Residential Clean Energy Credit, a nonrefundable credit, is designed to encourage homeowners to invest in renewable energy systems. The credit allows 30% of the costs of new, qualified clean energy property for your home installed anytime from 2022 through 2032. The credit percentage rate phases down to 26% for property placed in service in 2033 and 22% for property placed in service in 2034. There is no maximum limit on the credit amount, except for fuel cell property ($500 for each half kilowatt of capacity to a max of $1,667 for each half kilowatt of fuel cell capacity for a home occupied by more than one person.) Eligible improvements include solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technologies. To qualify the installations must produced by a qualified manufacturer, and the taxpayer must report the PIN for the item on their tax return; the improvements must be made to the main home; and as before, with the Energy Efficient Home Improvement Credit, the credit is available for properties used chiefly as a residence and not for business use in which case the credit is based on the share of the expenses allocated to non-business use.
Sales tax deductions are related to large purchases because they can influence a taxpayer’s overall tax liability, even though they are not direct tax credits. Taxpayers who itemize deductions can choose to deduct either state and local income taxes or state and local sales taxes. This can be particularly beneficial in states with no income tax. When making a large purchase like a vehicle or home renovation, the sales tax paid on these items can be substantial. By choosing to deduct sales taxes, taxpayers can significantly reduce taxable income, effectively creating a tax benefit like a credit. Eligible purchases include major home renovations, motor vehicles (cars, trucks, motorcycles, motor homes, recreational vehicles, and off-road vehicles,) boats, and aircraft. A taxpayer takes advantage of the sales tax deduction, by itemizing the deductions on Schedule A (Form 1040 or 1040-SR).
2024/2025 Comparison With 2023/2024 Tax Season
For the 2024/2025 tax season the federal tax credits for energy-efficient home improvements have been extended and expanded. This includes credits for solar panels, energy-efficient windows, and HVAC systems. Also, the tax credit for purchasing electric vehicles (EVs) has been extended. Buyers of qualifying new EVs can receive up to $7,500 in credits, depending on the vehicle’s specifications. Note that continued and expanded tax credits for energy-efficient home improvements and electric vehicles encourage environmentally friendly purchases and can lead to significant savings.
Importantly, the sales tax deduction remains available for taxpayers who itemize deductions. This can be particularly beneficial for large purchases like vehicles and home renovations. And in consideration of the sales tax deduction the standard deduction has increased for 2024. For married couples filing jointly, it rises to $29,200, an increase of $1,500 from 2023. For single taxpayers and married individuals filing separately, it rises to $14,600, and for heads of households, it will be $21,900.
Disadvantages for taxpayers regarding changes include income phase-out thresholds, meaning higher-income taxpayers may not qualify for certain benefits and large purchases may still result in significant sales tax liabilities, even with federal deductions available depending on state and local tax laws.
Conclusion
The IRS offers several tax credits for large purchases, including the Electric Vehicle (EV) Credit (up to $7,500 for qualifying vehicles), the Energy-Efficient Home Improvements Credit (nonrefundable, $1,200 for upgrades and $2,000 for qualified heat pumps or stoves), and the Residential Clean Energy Credit (nonrefundable, 30% of renewable energy system costs installed between 2022–2032). While sales tax deductions for major purchases aren’t direct credits, itemized deductions for state and local sales taxes can reduce overall tax liability, particularly in states with no income tax. However, all these provisions come with limitations, such as income phase-out thresholds that may disqualify higher earners and the possibility of significant sales tax liabilities depending on state laws.
Other Sources
Tax Credits
The Energy Efficient Home Improvement Credit: https://youtu.be/IXe1VURZGpk
How to Maximize your Home Improvement Tax Credit | Rob.CPA: https://youtu.be/HmfAcLlocxk
The Residential Clean Energy Credit: https://youtu.be/UHoHEEZEJkU
Residential Clean Energy Credit: https://www.irs.gov/credits-deductions/residential-clean-energy-credit
EV Tax Credit: What It Is, How It Works, and Do You Qualify? | The Federal EV Tax Credit: https://youtu.be/K6OIUshTIHI
EV Tax Credits: Everything You Need to Know for 2024 | Eligibility, Incentive Amount & More: https://youtu.be/zY6XPFEHiqs
The Clean Vehicle Credit (for 2023 and forward): https://youtu.be/D-f49l39deg
Federal Tax Credits for New Plug-in Electric and Fuel Cell Electric Vehicles Purchased in 2023 or After: https://fueleconomy.gov/feg/tax2023.shtml
What are Tax Credits? CPA Explains How Tax Credits Work (With Examples) https://youtu.be/gizup8rGaPU
17 Business Tax Credits: https://youtu.be/p-MLg1FY1yU
What are Tax Credits for Business Owners-Business Tax Credits-Form 3800: https://youtu.be/P7Gn3_cGLQ8
How to Get Small Business Tax Credits & Incentives | How We Saved $100,000 on Business Tax Expenses! https://youtu.be/WIYZ0lbxOBU
Legislation and Regulations
TITLE 26-INTERNAL REVENUE CODE: https://uscode.house.gov/browse/prelim@title26&edition=prelim
Inflation Reduction Act (IRA): https://www.govinfo.gov/content/pkg/PLAW-117publ169/pdf/PLAW-117publ169.pdf
Energy Policy Act of 2005: https://www.congress.gov/109/plaws/publ58/PLAW-109publ58.pdf
IRC Section 30D(g) Qualified 2- or 3-Wheeled Plug-In Electric Drive Motor Vehicles: https://www.irs.gov/businesses/irc-section-30dg-qualified-2-or-3-wheeled-plug-in-electric-drive-motor-vehicles
Clean vehicle tax credits: https://www.irs.gov/clean-vehicle-tax-credits
Energy Efficient Home Improvement Credit: https://www.irs.gov/credits-deductions/energy-efficient-home-improvement-credit
Code of Federal Regulations, Title 26: https://www.ecfr.gov/current/title-26
Miscellaneous
Schedule A (Form 1040, or 1040-SR) Itemized Deductions: https://www.irs.gov/pub/irs-pdf/f1040sa.pdf
What Is the Difference Between a Refundable and a Nonrefundable Credit? https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/what-is-the-difference-between-a-refundable-and-a-nonrefundable-credit/L5ZBHTL5Y
Refundable v. Non-refundable tax credits: What’s the difference? https://youtu.be/38DAHVg252Q
