Home owners can save on energy costs, make their homes more comfortable -- and more marketable -- and cut taxes by making energy-efficiency improvements that qualify for federal and potentially for state tax breaks.
Don’t wait too long. The latest federal tax breaks for energy improvements apply only to improvements made in 2006 and 2007.
HELP FROM THE FEDS
The Energy Tax Incentives Act of 2005 introduced two categories of tax credits for home owners…
Energy-efficiency improvements (qualifying doors and windows, insulation, etc.) to the building “envelope” (exterior of the home) and powering equipment.
Solar panels and other systems for powering homes.
Different credit limits and other rules apply to each category.
Caution: You must reduce the tax basis of your home by the amount of any credits claimed. But basis reduction only becomes important when you sell the home and your gain exceeds the allowable home sale exclusion ($250,000, or $500,000 on a joint return).
HOME IMPROVEMENTS
You can take a tax credit of up to $500 for making home improvements. This includes building envelope components that meet or exceed criteria set by the 2000 International Energy Conservation Code (manufacturers should provide this information). The credit is 10% of qualifying expenses.Examples: Insulation systems that reduce heat loss or heat gain, exterior windows (including skylights), exterior doors, and certain metal roofs meeting Energy Star requirements. (Energy Star is a government rating program that shows which items are more efficient than typical models.)
The credit is limited toup to 10% of the cost of materials. No more than $200 of the credit can be attributable to windows.
Heating and cooling equipment also can qualify for the credit, including 100% of qualifying expenses for…
Advanced natural air circulating fans (up to $50).
Natural gas, propane, or oil furnaces or boilers (up to $150).
The credit can be claimed only for items added to or replaced in an existing home, not for those installed in the course of building a new home. Manufactured homes (prefab and mobile homes) do qualify. The credit cannot be used for upgrades to vacation homes -- only for primary residences.
HEATING/COOLING SYSTEMS
Solar panels are nothing new -- they were popular in the late 1970s and the 1980s when the last energy crunch occurred. Today, there are several renewable energy sources, including solar panels, that can be used to power heating and cooling systems for homes and that qualify for a new tax credit. These include…Solar water-heating systems -- a credit of 30% of expenditures up to a maximum of $2,000.
Photovoltaic property (solar energy generating equipment) -- 30% of expenditures with a maximum of $2,000.
Fuel cell electric generating equipment expenditures -- 30% of costs with a maximum of $500 for each half kilowatt of capacity.
Exception: No credit can be claimed for systems used to heat swimming pools and hot tubs.
ADDED TAX INCENTIVE
There are very few provisions in the tax law that let you effectively multiply your tax write-offs from a single expenditure, and here is one of them -- you can finance your home-energy improvements through a home loan, deduct the interest, and claim a credit for the energy improvement made with the proceeds of the loan.
Deductibility: The interest may be treated as “acquisition indebtedness,” producing a tax deduction if the loan is taken to make an energy expenditure that is considered to be a substantial improvement to the home. There is not much Tax Code guidance on what can be treated as a substantial improvement in terms of cost or relative to the home’s value or basis. What is certain is that the expenditure must add to the home’s value or prolong its useful life in order to be viewed as “substantial.” If so, interest on borrowing up to $1 million is deductible.
But even if the improvement isn’t viewed as “substantial,” the interest is still deductible on borrowing up to $100,000.
Low-interest loans: States and energy utilities may provide affordable financing to make energy improvements -- a boon to home owners who cannot or prefer not to use home-equity financing. For instance, Pennsylvania’s Energy Star loans carry interest as low as 5.99%.
Note: Interest on these loans isn’t deductible because the loans are not secured by the residences, a requirement for home-mortgage treatment.
STATE TAX BREAKS
Like the federal government, states want to encourage energy conservation measures, and many provide tax breaks. Since the start of 2006, more than 100 bills have been introduced at the state level to provide tax incentives for energy-saving home improvements.
Sales tax holiday: States may waive their sales tax on certain energy-efficient products to give home owners added incentive to upgrade their residences. For example, from October 6, 2005, through October 9, 2005, Georgia had a sales tax holiday on certain Energy Star products costing up to $1,500 -- a $105 tax savings for qualified purchases up to the maximum 7% sales tax in certain areas of the state. A number of other states, including Connecticut, Illinois, Kansas, New York, Pennsylvania, Rhode Island, and Vermont, are currently weighing a similar tax break. To find out if your state plans such a break, contact your state’s tax, finance, or revenue department.
LOW-INCOME HOME OWNERS
Home owners with very modest incomes can’t benefit from tax breaks (because they don’t owe taxes), but still want to save money by making energy improvements to their residences. Government programs can help…
The Weatherization Assistance Program from the Department of Energy (www.eere.energy.gov/weatherization) helps low-income families (check the site for eligibility requirements) make permanent energy-saving improvements, such as foam door seals, to help cut fuel consumption.
States such as Colorado and Washington have similar programs for low-income families. Check with your state’s energy department.
