Energy Tax Credits Still Available
Dear Jim: I heard about the new energy tax credits for improvements. How long are they effective and what home items are covered? Also, will these credits save enough to make it worthwhile to make improvements? - Paul N.
Dear Paul: People may not realize these are tax credits and not tax deductions. A tax credit actually reduces your tax bill by the total amount of the credit. A tax deduction reduces just the taxable base, so the actual savings depends upon your specific tax bracket. The tax credit amount is listed on line 52 of federal tax form 1040, and you must also complete tax form 5695 to calculate the tax credit.
The Energy Policy Act of 2005 covers most typical energy conservation improvements to your home. These include insulation, replacement windows and improvements, doors, metal roofing, heating and cooling systems, water heaters, and solar systems. In most cases, the improvements must meet the 2000 IECC (International Energy Conservation Code) specifications. Most contractors can advise you.
Many of the energy tax credits are for approximately 10 percent of the installed cost, but some are substantially less. The maximum total tax credit allowed for the two-year period is $500, regardless of how many efficiency improvements you make.
Using alternative fuels and heating provides the largest tax credit of 30 percent, up to a maximum of $2,000. These include solar water heating and photovoltaics (solar cells), as well as fuel cells for producing your own electricity at home. For many homes, even with a $2,000 tax credit, the economic payback for these alternative fuel improvements is a relatively long period. Solar water heating is the one exception where it is economically feasible for most homes.
Tax credits for the alternative fuels improvements mentioned above were extended into the 2008 tax year. Most other residential efficiency improvements must be installed before the end of 2007 unless the Congress acts to extend them.
Door improvements provide a higher maximum tax credit than replacement windows. In general, replacing windows will save more energy, but is a more expensive improvement project. Installing efficient exterior doors and/or storm doors receives a credit of 10 percent of the costs, up to a $500 maximum credit. Installing efficient windows, skylights, and storm windows receives a $200 maximum credit.
If you need a new roof, consider installing one of the many types of new residential metal roofing materials. This is economically and environmentally a good decision because metal roofs last a lifetime, and you will receive a $500 tax credit. Metal roofs get a tax credit because they block heat from the sun during the summer, so air-conditioning energy usage is lower. The tax credit for adding insulation is 10 percent of its cost.
Installing a new heat pump (air-to-air or geothermal) provides up to a $300 credit compared to a new gas or oil furnace (efficiency of 95 percent) for only a $150 credit. Make sure the efficiencies (HSPF and SEER) of the heat pump you install are high enough to qualify for the tax credit.
Adding an efficient blower motor to the new furnace or heat pump qualifies for a tax credit of $50. The blower motor must not use more than 2 percent of the heating system's total energy use. This usually means only a variable-speed blower motor qualifies. These motors are efficient and improve comfort, but they cost several hundred dollars more than a standard blower motor.
Installing an efficient gas, oil or propane water heater provides a $300 credit. Standard tank-type electric water heaters are not included because they all are reasonably efficient. If you have an electric water heater, you can get a $300 tax credit by installing a heat pump water heater.
Send your inquiries to James Dulley, Illinois Country Living, 6906 Royalgreen Dr., Cincinnati, OH 45244 or visit www.dulley.com.
For more information on energy tax credits, visit the Alliance to Save Energy Web site: http://www.ase.org/content/article/detail/2654