Uncle Sam Helps Pay for an Energy Efficient Home

Making energy-saving improvements this year may result in big tax savings. There are federal tax credits available for purchases made this year regardless of your income. Take a look at the expenses that qualify. We’ll also tell you about a federal tax credit available for golf-cart-like electric vehicles that are popular in some communities.

CUT UTILITY BILLS AND TAXES

If you like the idea of “going green” or just want to lower your utility bills, Uncle Sam is willing to help with two different federal income tax credits. The credits equal up to 30 percent of your expenditures for qualifying energy-efficient home improvements and equipment. While these credits are not new, the rules have changed dramatically in the favor of taxpayers. Here is what you need to know about two valuable tax breaks.

FIRST CREDIT
Covers Common Improvements and Equipment

SECOND CREDIT
Covers More Unusual, Expensive Equipment

The first credit equals up to 30 percent of expenditures for qualifying home improvements and equipment in 2009 and 2010. This credit will expire at the end of 2010 unless Congress extends it.

The maximum credit for 2009 and 2010 combined is limited to $1,500. So if you claim an $800 credit this year, you can claim up to another $700 in 2010.

While the $1,500 limit may seem small, remember that we are talking about a credit rather than a deduction. Credits are more valuable because they reduce your federal income tax bill dollar for dollar. In contrast, a deduction only reduces your tax bill by a percentage of a dollar (equal to your marginal tax rate).

Another nice factor is that this credit covers a wide range of common energy-saving expenditures for your principal U.S. residence. (You can’t claim the credit for expenditures on a vacation home or foreign residence.)

Even better, there are no income limits on the credit, and you can use it to reduce both your regular federal income liability and any alternative minimum tax (AMT) that you may owe for this year.

Subject to the overall $1,500 limit for 2009 and 2010, the credit equals 30 percent of qualifying expenses for the following:

Exterior windows including skylights and storm windows.

Exterior doors including storm doors.
Insulation systems designed to reduce heat loss or gain.

Metal and asphalt roofs with heat reduction components.

High-efficiency central air conditioners.

Furnaces, water heaters, and water boilers that run on natural gas, propane, or oil.

Electric heat pumps and electric heat pump water heaters.

Circulating fans used in natural gas, propane, and oil furnaces.

Biomass fuel stoves used for heating or hot water.

Items 5 through 9 include costs for site preparation, assembly and installation.

To illustrate how the $1,500 two-year credit limit works, here’s an example. Say you spend $3,000 in 2009 for some qualifying new windows and a biomass fuel stove. You can claim a nice $900 credit on your 2009 return ($3,000 times .30 equals $900). Then, in 2010, you spend a total of $7,000 for a qualifying central air conditioner and some qualifying attic insulation.

Unfortunately, you can’t claim $2,100 credit on your 2010 return ($7,000 times .30 equals $2,100). Instead, you can only claim the $600 that remains from the two-year $1,500 limit ($1,500 minus $900 already claimed in 2009 equals $600 left for 2010).

To claim the credit, you must obtain a manufacturer’s certification that the product is eligible for the credit. (After May 31, 2009, Energy Star label windows and skylights don’t automatically qualify.)You may find the certification on the packaging, or you may have to print it out from the manufacturer’s Web site. Keep it with your tax records.

Second Credit Covers More Unusual, Expensive Equipment For 2009 through 2016, you can claim another separate federal income tax credit equal to 30 percent of expenditures to buy and install more unusual (and more expensive) energy-saving equipment for your home. Except for fuel cell equipment, there is no dollar limit on this credit, so big expenditures can translate into big credits, and this can go on year after year through 2016.

There are no income limits on the credit. Even wealthy folks can take advantage. And you can use it to reduce both your regular federal income liability and any AMT.

And if your expenditures generate a really big credit that exceeds your 2009 tax bill, you can carry the excess credit amount over to next year and beyond (this is relatively unlikely to happen, but it’s nice to know).

Qualifying Equipment Costs

The credit equals 30 percent of qualifying expenditures for the following items, including costs for site preparation, assembly, installation and related piping and wiring. (There is no dollar limit on the credit for the first four.)

Solar water heating equipment for your U.S. residence. This can include a U.S. vacation home but a residence in a foreign location does not qualify.

Solar electricity generating equipment for your U.S. residence (including a vacation home).

Wind energy equipment for your U.S. residence (including a vacation home).

Geothermal heat pump equipment for your U.S. residence (including a vacation home).

Fuel cell electricity generating equipment for your U.S. principal residence (vacation homes are not eligible). The maximum annual credit for fuel cell equipment is limited to $500 for each .5 kilowatt hour of capacity.

Notes: You can’t claim this credit for equipment used to heat a swimming pool or hot tub. Special rules apply to expenditures for residential co-ops and condo buildings.

Keep Certification Statements

For this credit too, you must get your hands on a manufacturer’s certification that the equipment you buy is eligible for the tax break. Look on the packaging, the manufacturer’s Web site or ask the contractor performing the installation.

In any case, keep the certification statement with your tax records (it is not attached to your tax return). Also, keep records that prove how much money you spend, including amounts for site preparation, installation, etc.

Don’t Overlook Additional Benefits

The two federal income tax credits outlined in this article might not be the end of the story. You might also be eligible for state and local tax benefits, subsidized financing deals, and utility company rebates (especially for expensive installations that qualify for the second credit).

WISDOM FOR TODAY’S ECONOMY

In some parts of the country, vehicles that look like golf carts are used to run short errands. These “neighborhood electric vehicles,” may qualify for a federal tax credit (and in a few states, additional state benefits). A recent law provides a credit for qualifying plug-in electric drive motor vehicles, such as the Chrysler GEM. For 2009, the credit can be worth up to $2,500 or more, depending on the vehicle battery. Ask your tax adviser for additional details. Typically, the vehicles cost between $8,000 and $20,000 and go 30 to 40 miles on a charge.