Key highlights: Renewable energy is experiencing a surge in popularity — electric vehicle sales are at an all-time high, and residential and commercial solar projects are going up in virtually every community in the country. This is unsurprising; since 2022, the U.S. government has significantly ramped up incentives for green […]
Both solar tax incentives and charitable remainder unitrusts (CRUTs) are powerful tax strategies that offer valuable ways to reduce your income tax. So which one is right for you?
The typical guidance is that solar tax credits are a great tax strategy for those who have a high income in any given year, and that CRUTs are a great tax strategy for those who have unrealized capital gains. But if you have both, deciding which of the two strategies is right for you (or in which proportion) can be daunting. I’ll break down the relative advantages and disadvantages of each approach in this article, and I hope I can clear it up! If you still have questions or want to walk through these strategies with one of our experts, please feel free to book a call with us here.
Before we go any further, please feel free to read our introduction guides if you’re not familiar with CRUTs or solar tax credits yet.
Setting up a CRUT provides a charitable tax deduction in the year that you fund it, and solar tax incentives provide tax credits and depreciation, both of which can offset a significant amount of your income tax. So if you have both a high income AND unrealized capital gains that could take advantage of the CRUT structure, which one should you do?
My first answer is that it’s possible to do both at the same time; there is nothing that forces you to choose between one or the other. But there are certain circumstances that can make one or the other more attractive, so let me break those down in this article.
At Valur, we often talk about charitable remainder trusts as a trade-off between immediate liquidity and long-term ROI, with the charitable tax deduction as a bonus. But if you have a high income, then the charitable tax deduction can become an important tool for minimizing your tax burden. It’s worth paying attention to.
The biggest advantage that CRUTs have over solar tax incentives for mitigating this year’s income tax is that it doesn’t require any active participation. You can fund the trust right up to the last minute (within the calendar year). The charitable tax deduction works just like any other charitable tax deduction; you get to use it on your income tax return on the year that you fund the trust, and if you can’t use it all that year it rolls over to the next. You can also add more assets to the trust in future years or make new trusts to get more charitable tax deductions. From this perspective, the only limitation is the amount of assets you are willing to put into the trust!
There are some limits, though. Because you’re not typically putting cash into the CRUT, the charitable tax deduction is typically limited to 30% of your AGI in the year that you fund it. So while it can help with your income tax burden, it can’t reduce it to zero.
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Solar investments typically require smaller upfront investments than CRUTs to mitigate income tax, but they require cash and planning. If you’re able to do all that, then they can reduce your income tax burden even further than CRUTs.
The three main things to keep in mind are the material participation requirements (if you are trying to write off active income), and timing concerns. The project that you invest in must be completed within the calendar year that you plan on using the tax credits, and if you are writing off active income, then you need to spend 100 hours actively participating in the endeavour. Typically, we suggest that people who are interested in this strategy make their decisions earlier in the year to have time to complete all the requirements. In addition, tax credits and depreciation both have their own deduction limitations. Tax credits can offset up to 75% of your federal tax liability while depreciation is typically limited to $313,000/person ($626,000 for married filing jointly) in the first year and 80% of your income in the second year. Solar tax incentives require a little more planning ahead than CRUTs.
If you have the liquidity, time, and foresight to take advantage of solar tax incentives, you can use them to reduce your income tax burden even further than CRUTs can!.
Some people use both solar tax incentives and CRUTs together to tackle their income tax burden. You can do this by funding a CRUT to get the charitable tax deduction and using solar investments to reduce your income tax burden even further after that. This allows you to efficiently utilize a variety of your resources; you can use cash towards solar investments and your appreciated assets to fund a CRUT. You can defer a capital gains tax hit when selling and diversifying appreciated assets, while also leveraging cash on hand to bolster the income tax reduction past what you can achieve with charitable tax deductions alone.
Both kinds of deductions can roll over to future years if you can’t use them all on this year’s return. If you’re interested in talking to us about how you can leverage these two powerful tax strategies, let’s get in touch.
We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.
From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.
Want to see what Valur can do for you or your clients? Explore our Learning Center, use our online calculators to estimate your potential savings or schedule a time to chat with us today!
