What Are Carbon Tax Credits and Who Can Claim Them?

While the term “carbon tax credit” is common, the United States does not have a federal carbon tax. Instead, the government’s tax code offers incentives to encourage environmentally friendly investments. These incentives are tax credits, which directly reduce a taxpayer’s total income tax liability on a dollar-for-dollar basis.

These benefits are a collection of distinct incentives for different taxpayers and activities. Individuals can claim credits for purchasing an electric vehicle or making their homes more energy-efficient. Businesses have access to credits designed to spur investment in renewable energy, clean vehicle fleets, and carbon capture technologies.

Carbon Tax Credits for Individuals

The Clean Vehicle Credit applies to the purchase of new and, in some cases, used qualifying vehicles. For new clean vehicles, a credit of up to $7,500 is available. To qualify, the vehicle must have its final assembly in North America, and there are specific requirements for the sourcing of its battery components and critical minerals. The manufacturer’s suggested retail price (MSRP) cannot exceed $80,000 for vans, sport utility vehicles, and pickup trucks, or $55,000 for other vehicles.

There are also income limitations for the buyer. Your modified adjusted gross income (AGI) for the new vehicle credit cannot surpass $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers. For used clean vehicles, a credit of up to $4,000 is available, limited to 30% of the sale price, which must be $25,000 or less. The vehicle must be at least two model years old, and the income caps are lower: $150,000 for married couples, $112,500 for heads of households, and $75,000 for other filers. Both new and used credits can be transferred to a dealer at the point of sale for an immediate discount.

Homeowners can benefit from the Residential Clean Energy Credit, which encourages the installation of new, qualified clean energy property. This credit is equal to 30% of the costs of new, qualified solar, wind, geothermal heat pump, and battery storage technology. The battery storage technology must have a capacity of at least 3 kilowatt-hours. There is no overall credit limit for property placed in service from 2022 through 2032.

The Energy Efficient Home Improvement Credit applies to upgrades that improve a home’s energy efficiency. This credit is for 30% of the cost of qualifying improvements, but it is subject to annual limits.

• A maximum total credit of $1,200 per year for most property.
• A limit of $600 for exterior windows and skylights.
• A limit of $250 for any single exterior door, up to a $500 total for all doors.
• A higher limit of up to $2,000 per year for qualified heat pumps, biomass stoves, or boilers.

Carbon Tax Credits for Businesses

The Commercial Clean Vehicle Credit is for businesses that purchase qualified electric or fuel cell vehicles. The credit amount is the lesser of 15% of the vehicle’s cost basis (or 30% if not powered by gas or diesel) or the incremental cost compared to a comparable gas-powered vehicle. The maximum credit is $7,500 for vehicles with a gross vehicle weight rating under 14,000 pounds and $40,000 for all other vehicles.

For larger-scale projects, businesses can use the Investment Tax Credit (ITC) or the Production Tax Credit (PTC). The ITC is a credit based on a percentage of the investment cost of a qualifying energy property, such as a large solar array. The base credit is 6%, but it can increase to 30% if the project meets specific prevailing wage and apprenticeship requirements.

The PTC is a per-kilowatt-hour credit for electricity generated and sold from qualified renewable resources over a 10-year period. Businesses must choose between claiming the ITC or the PTC for a single project; they cannot claim both. The choice depends on the project’s financial structure, with high-cost, lower-output projects often favoring the ITC and lower-cost, high-output projects benefiting more from the PTC.

The Credit for Carbon Oxide Sequestration, known as Section 45Q, is available to businesses that capture carbon oxides and securely store them. The credit features a base rate and an enhanced rate that is five times larger. To receive the enhanced rates, such as $85 per metric ton for carbon stored in secure geologic formations, projects must meet strict prevailing wage and apprenticeship requirements.

How to Claim Energy Tax Credits

To claim any energy-related tax credit, you must gather all necessary records and file specific forms with your tax return. For vehicle credits, this includes the seller’s report received at the time of purchase, which contains the vehicle identification number (VIN) and sale price. You must file Form 8936, Clean Vehicle Credits, and carry the final amount to your Form 1040.

For home energy credits, you need detailed receipts, proof of payment, and manufacturer certification statements confirming the products meet energy efficiency standards. These credits are claimed using Form 5695, Residential Energy Credits, with the total also flowing to your Form 1040.

For business credits like the ITC, documentation must substantiate the cost basis of the energy property. These credits are often calculated on source forms like Form 3468, Investment Credit, and then consolidated on Form 3800, General Business Credit. This form is filed with the business’s main income tax return, such as Form 1120 for a corporation.

It is important to retain all supporting documents, including receipts, seller reports, and manufacturer certifications, for at least three years after filing your tax return.