Energy Efficiency Tax Credits

If energy-saving home improvements top your list for 2010, Uncle Sam likewise has plans to reward you with valuable energy efficiency tax credits. Thanks to the American Recovery and Reinvestment Act of 2009 (ARRA), you once again have the opportunity to earn up to $1,500 in one-time credits with upgrades that provide in-home comfort, reduce air pollution and deliver energy savings long after your tax return has been submitted.

 

Here’s how it works: Purchase and install any combination of qualifying products at your primary residence by December 31, 2010, and with the help of IRS Form 5695, purchase receipts and manufacturer certifications (e.g., the Energy Star label for windows), and your tax adviser’s guidance, apply for credits equal to 30 percent of the cost--and, in some cases, the installation--of each qualifying product you've purchased.

 

Energy efficiency tax credits can be more valuable than similar tax deductions, as credits reduce the dollar-for-dollar amount of tax you pay while deductions lower your taxable income, so this is one deal you don’t want to pass up. And remember when similar incentives were offered during the 2006 and 2007 tax years? If you earned up to but claimed less than the energy efficiency tax credit limit back then, you’ll be able to claim the unused portion in the coming year (once again, consult your tax adviser for details). Local utility and state rebates may compound your savings, and can be found in the DSIRE database of state incentives.

 

Consider the following energy-saving products for your 2009 home improvement plans, and build a strategy that’ll trim your taxes as well as ongoing energy costs.

 

Exterior windows, storm windows and skylights: All Energy Star windows qualify and can earn energy efficiency tax credits equal to 30 percent of their cost, up to $1,500 total.

 

Insulation, exterior doors or roofs: You can earn credits equal to 30 percent of the costs of these products (exclusive of their installation), once again up to $1,500 total. Storm doors are among the entry options that qualify, and insulation solutions include caulking, weatherstripping, foam sealants and other seals that limit air infiltration. Doors and insulation must meet the requirements for your region of the 2001 or 2004 International Energy Conservation Code, the model energy code for buildings. Qualifying roofs must be metal with pigmented coatings or asphalt with cooling granules that meet Energy Star requirements.

 

Central air conditioner, heat pump, water heater or bio gas (e.g., corn) stove: These qualify for up to 30 percent toward the full purchase price, including cost of installation. Also note a key difference in this credit category compared with prior years: For 2010, geothermal heat pumps are eligible for a separate tax credit, with no cap on the dollar amount of credits you can earn based on 30 percent of the heat pump's cost. Only Energy Star geothermal heat pumps qualify, and they must be placed in service by December 31, 2016.

 

Furnace or boiler: To qualify for a 30 percent energy efficient tax credit on product cost and installation, natural gas, propane or oil furnaces and boilers must have at least a 95 percent annual fuel utilization efficiency.

 

Finally, a few general notes to remember as you plan purchases. Strict criteria apply to eligible heating and cooling equipment, so consult the guidelines as provided by the Alliance to Save Energy to ensure your selection will make the cut and earn an energy efficiency tax credit. Qualifying windows, doors, roofs and insulation must be expected to last at least five years (sufficiently demonstrated by the accompaniment of a two-year warranty). And keep in mind that improvements made within condos and co-ops are apportioned to the owners, and energy efficiency tax credits can’t be taken against the Alternative Minimum Tax (AMT).