Published: November 18, 2009
Earn a residential energy tax credit and lower your utility bills at the same time when you improve the energy efficiency of your home.
Update:The tax credit discussed in this article was for 2009 and 2010. A smaller tax credit of up to $500 is available for certain home improvements through Dec. 31, 2014. Find out the details.
Uncle Sam is encouraging home owners to become more green by offering residential energy tax credits. Eligible energy-efficiency home improvements, such as adding insulation, can earn a tax credit of up to $1,500. More ambitious projects, such as installing solar panels, can net a credit worth 30% of the total cost.
Improvements must meet IRS energy-efficiency standards to qualify for a residential energy tax credit. Don’t assume an Energy Star label is enough. Save receipts and manufacturers’ statements certifying the tax credit-worthiness of the products. The IRS could ask for them.
Tax credit capped at $1,500
Replace aging windows, HVAC systems, and non-solar water heaters, install efficient biomass stoves, add insulation, or fix a worn roof, and you might collect a tidy credit come tax time. To encourage greater energy efficiency, homeowners can recoup 30% of the cost, up to $1,500, for making any of these qualifying upgrades during 2009 or 2010. Claim the credit for the year in which you complete the project.
The improvements must be made to your existing primary residence to be eligible. You can include the labor costs for HVAC, stove, and water heater installations; only the cost of materials counts for insulation, roofs, and windows (as well as exterior doors and skylights). Ask your contractor for a receipt that itemizes materials and labor. The IRS refers to the tax relief you can get for these projects collectively as the Nonbusiness Energy Property Credit.
Keep in mind that the $1,500 cap applies to all of the projects combined for both years. You can’t claim a $1,500 credit for new windows in 2009 and a separate $1,500 credit for a new furnace in 2010. A $5,000 project would max out the credit.
Uncapped energy tax credit
There’s no cap on tax credits for a handful of residential projects that involve alternative energy sources including solar, geothermal, and wind. That’s good news considering costs can run into five figures for photovoltaic systems (for electricity), solar water heaters, geothermal heat pumps, and small wind turbines. Fuel cells qualify too, though they’re subject to slightly different criteria.
This tax incentive is called the Residential Energy Efficient Property Creditby the IRS. Homeowners can earn it anytime between 2009 and 2016 for the tax year that one of these systems is placed into service. The tax credit, equal to 30% of the project cost, applies to second homes as well as primary residences. New homes are eligible too. A rental property generally is excluded unless it’s a second home that’s only rented out part of the year.
You can use the uncapped tax credit even if you’re using the capped tax credit. In fact, you can claim separate uncapped credits for a wind turbine, a geothermal heat pump, and a solar water heater. Use IRS Form 5695, which has separate pages for capped and uncapped tax credits.
How tax credits work
A tax credit is usually more valuable than a tax deduction because the credit lowers your tax bill–or increases your refund–dollar for dollar. Think of it this way: A $1,500 deduction will save $363 on taxes owed for a married couple filing jointly with an adjusted gross income of $100,000. That same couple would save the full $1,500 with a $1,500 tax credit. Married filing separately taxpayers may be able to take separate $1,500 tax credits.
Residential energy tax credits do have limits. The IRS considers the credits “non-refundable,” which means you can’t claim more in credits than you paid out in federal income taxes. You may be able to carry forward some of your surplus uncapped tax credits to future years.
While Form 5695 shouldn’t take more than an hour or two to complete, it’s a good idea to consult a tax adviser. Credits are gold, so you don’t want to risk missing one. H&R Block’s average fee to prepare a tax return is $187, but cost varies considerably depending on complexity.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.