The recently enacted Energy Tax Incentives Act of 2005 includes new and substantial tax incentives for individuals to make energy-saving (and some energy-creating) improvements to their homes.The incentives come in the form of tax credits, which reduce federal tax bills on a dollar-for-dollar basis. Unlike many other tax credits contained in the Internal Revenue Code, these energy tax credits are not phased out for higher-income individuals. These credits are available for certain energy-saving home improvements made in 2006 and 2007.
Whether a home improvement creates or saves enough energy to qualify for a tax credit under the Energy Act's complex and technical rules will probably be determined based mainly on manufacturer certifications in the materials that come with their products. The individual taxpayer would have to determine whether her use of the equipment qualifies for the tax credits, and how to make the best use of them.
Solar and fuel-cell equipment
Individuals will be able to claim a tax credit each year for the following:
* Thirty percent of the cost of equipment that uses solar energy to generate electricity (photovoltaic property), up to a $2,000 maximum tax credit for the tax year;
* Thirty percent of the cost of solar water-heating equipment, up to a $2,000 maximum tax credit for the tax year; and,
* Thirty percent of the cost of a fuel-cell power plant (new technology that converts fuel into electricity using electromechanical methods, and meets other detailed requirements), up to a $500 maximum tax credit for the tax year.
There's no carry-forward of credits that are unused because of the above dollar limitations. The credits are nonrefundable. However, if the credit exceeds the excess of the regular income tax over the tentative minimum tax for the tax year (after reduction by the sum of the other nonrefundable personal credits), the excess will be carried over to the following tax year, and will be added to the residential energy tax credit for that year.
In determining cost, installation as well as hardware costs are taken into account. The equipment in the first two categories listed above may be installed in your principal residence or in a second residence such as a vacation home.
However, the equipment in the third category must be installed in your principal residence. All three types of equipment must be installed in a residence located in the United States, and can't be used to heat a swimming pool or hot tub.
Example 1: In 2006, your client buys $10,000 of solar energy equipment and has it installed in her principal residence. She also buys $6,000 of solar water-heating equipment that she has installed in her vacation home. Her total energy tax credit for 2006 is $3,800, consisting of:
* $2,000 for the solar energy equipment (30 percent of $10,000 is $3,000, but the credit limit is $2,000); plus,
* $1,800 for the solar water-heating equipment (30 percent of $6,000).
Example 2: The same facts apply as in Example 1, plus your client buys $5,000 of solar energy equipment for her vacation home in 2007. When your client files her federal income tax return for 2007, she'll be able to claim another $1,500 tax credit (30 percent of $5,000).
Energy-efficient improvements
Individuals will be able to claim a tax credit for buying an assortment of energy-saving improvements and installing them in their principal residence. The credit depends on the type of improvement.
The credit per improvement is:
1. 10 percent of the cost of energy-efficient building envelope components. These components consist of:
* Insulation materials or systems that reduce heat loss/gain;
* Exterior windows (including skylights);
* Exterior doors; and,
* Certain metal roofs with special coatings designed to reduce heat gain.
You must be the first user of the equipment, and the equipment must be expected to last for at least five years.
2. Up to $300 tax credit for the cost of energy-efficient building property (electric heat pump water heater, electric heat pump, geothermal heat pump, central air conditioner, and natural gas, propane or oil water heater meeting specific energy efficiency standards).
3. Up to $150 credit for a natural gas, propane or oil furnace or hot water boiler.
4. Up to $50 credit for an advanced main air circulating fan.
The overall lifetime tax credit for all of the above improvements is $500, but only $200 of this credit amount may be for energy-saving windows.
Example 3: In 2006, your client spends $2,000 on certified energy-efficient insulation for his principal residence, and installs certified energy-efficient windows costing $1,800. In 2007, he spends $1,500 on a new certified energy-efficient natural gas boiler for his principal residence.
For 2006, your client may claim a $380 tax credit on his federal income tax return (10 percent of the $2,000 cost for insulation, plus 10 percent of the $1,800 cost for the windows). On his federal income tax return for 2007, he may claim a $120 tax credit for the boiler installed in that year, since that is the maximum amount of the credit still available (maximum lifetime credit of $500 less the $380 credit claimed for 2006).
Example 4: For his principal residence, your client spends $3,000 on certified energy-efficient windows in 2006, and $1,200 on a new certified energy-efficient natural gas boiler in 2007.
Your client is entitled to a $200 tax credit on his federal income tax return for 2006 (the lesser of $200 or 10 percent of the $3,000 cost of the windows) and $150 on his return for 2007 (the lesser of $150 or the cost of the boiler).
