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How to Lower Your Taxes with Energy-Efficient Improvements

Learn all the rules and tax incentives for going green in your home.

By
Laura Adams, MBA,
Episode #153

Considering “going green” in your home? There are new incentives for homeowners that can make your living space more energy-efficient and lower your taxes.

How to Lower Your Taxes with Energy-Efficient Improvements

The reason tax breaks are offered as incentives for purchasing state-of-the-art, energy-efficient products, such as heating and air conditioning systems and exterior windows, is because those products are expensive. All that fancy technology comes at a price, and boy did I learn about it first-hand last week. The compressor for our downstairs air conditioner died--which is a real emergency when you live in Florida, even in December!

New Green Tax Incentives of 2009

The newest green tax incentives are part of the American Recovery and Reinvestment Act of 2009. That legislation expanded tax credits for expenses you incur to reduce the amount of energy you use or to install alternative energy equipment. There are two tax credits that apply to homeowners who make energy-efficient improvements to their primary residence located in the U.S.: They’re called the Nonbusiness Energy Property Credit and the Residential Energy Efficient Property Credit. Even though they sound similar, they’re completely different tax benefits.

What’s the Nonbusiness Energy Property Credit?

Let’s cover the Nonbusiness Energy Property Credit first. It applies to certain improvements that average consumers might make to their existing homes, like energy-saving:

  • Roofs

  • Air conditioners

  • Heat pumps

  • Water heaters

  • Exterior windows, skylights, doors

  • Insulation

By the way, labor is a qualified expense for some improvements, such as installing appliances, but not for others, such as adding insulation.

This credit existed previously, but it expired after 2007. Now it’s been reinstated and expanded with higher efficiency standards. The credit was increased from 10% to 30% of the cost of qualifying improvements. The maximum credit limit was also increased from $500 to $1,500. That’s the total amount you can claim for the combined 2009 and 2010 tax years. Qualifying improvements must be placed into service in either 2009 or 2010. By the way, labor is a qualified expense for some improvements, such as installing appliances, but not for others, such as adding insulation.

An Example of the Nonbusiness Energy Property Credit

Here’s an example: If I spend $5,500 to have a qualifying high-efficiency air conditioner installed in my home in 2009 or 2010, I’ll receive a credit for 30% of the cost up to $1,500. 30% of $5,500 is $1,650, which exceeds the allowable credit--so my credit would only be $1,500. The credit reduces the amount of tax I owe by $1,500. And if I don’t owe any tax, my refund would be increased by $1,500. Now the effective cost of my new A/C system is reduced from $5,500 to $4,000.

What’s the Residential Energy Efficient Property Credit?

The second green incentive for homeowners is the Residential Energy Efficient Property Credit. This tax benefit is designed to encourage investment in more hard-core alternative energy equipment for existing homes and new construction. It includes item such as:

  • Solar electric systems

  • Solar water heaters

  • Geothermal heat pumps

  • Fuel cell property

  • Wind turbines

The credit amount is also 30% of the cost of the equipment and usually includes the labor to install it. Beginning in 2009, there’s generally no cap on this credit and it’s available for equipment placed into service through 2016. But it’s a nonrefundable credit, which is an important distinction because that means it can only reduce your tax liability to zero.

An Example of the Residential Energy Efficient Property Credit

Here’s an example: Let’s say my electric water heater went kaput and I decide to replace it with a solar water heater system. If it costs $6,000 to install, I would receive a tax credit for 30%, or $1,800. That’s wonderful if I owe $2,000 in taxes, for instance, because the $1,800 credit would reduce my tax liability to $200. But the credit doesn’t help much if I owe little or no taxes, because it won’t come back to me as a tax refund since it’s a nonrefundable credit.

How To Claim Energy Credits

If you’re eligible, you can claim both credits on IRS Form 5695 and submit it along with your tax return. You must claim the credit on the return for the year that the improvement was made to your home. So if I install a new A/C system before the end of 2009, I have to claim the credit on my 2009 tax return.

Other Green Incentives May Be Available

In addition to federal tax credits, you may also qualify for state incentives or rebates from your utility company. You’ll find a comprehensive list of all energy incentives at the Database of State Incentives for Renewables & Efficiency (DSIRE) at dsire.usa.org.

Which Products Qualify for Credits?

Remember that not all energy-efficient products qualify for a tax credit. Be sure to see the manufacturer’s tax credit certification statement in writing or on their website before buying anything. For a good overview on which products are eligible and the required specifications for each, go to energystar.gov. You’ll find links to the sites I mentioned below.

Administrative

I’m glad you’re reading. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

More Resources:
U.S. Department of Energy
2009 IRS Form 5695
Energy Incentives for Individuals in the American Recovery and Reinvestment Act

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