Tax Credits Available for Home Improvements

Get up to $500 in Tax Credits for Energy-saving Home Improvements

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

By now you've felt the impact of rising energy costs. With soaring energy prices, you can't help but wonder how much of that high-priced heat is escaping during the cold, winter months through your non-thermal windows or drafty front door. And, during the summer, you get the feeling your air conditioner is pumping more dollar signs than cool air.

Under the recently revised Energy Savings Tax Act of 2005, tax credits are available for certain home improvements made in both 2006 and 2007, including insulation materials, exterior windows, skylights, exterior doors, qualified metal roofs, air-circulating fans, designated furnaces or water heaters, as well as certain heat pumps and air conditioners.

It is important for the homeowner to verify if a purchase meets the energy efficient criteria established by the IRS. Each manufacturer has a certification statement included in the packaging, or a certificate that can be downloaded from the company's website. The certification will prove that the material you have purchased qualifies for the credit. Taxpayers should keep the certification document with his or her tax records. The certification should not be mailed to the IRS with your tax return in order to claim the credit.

Taking advantage of the Tax Credit for Energy Efficient Improvements to Existing Homes will not only cut your tax bill, but also provide added energy savings. This credit has a lifetime ceiling of $500 and may not be taken against the Alternative Minimum Tax (AMT). A credit is often preferable to a deduction. For example, a $1.00 credit reduces your tax bill by $1.00, while a $1.00 deduction will only reduce your tax bill by .15 to .35 cents.

There are two categories of improvements that qualify for this credit. A Category One expenditure is an improvement to the building envelope. The IRS defines a building envelope as (1.) insulation materials or similar energy saving system, (2.) exterior windows, including skylights, (3.) exterior doors, and (4.) a metal roof with appropriately colored coatings that are designed to reduce heat gain. Taxpayers are eligible to receive a credit of 10 percent of the cost of these items. (The IRS has limited the maximum credit for windows to $200.)

Taxpayers are eligible to receive a dollar-for-dollar tax credit for Category Two expenditures. This category, however, has three specific caps. The IRS allows a $50 maximum for each advanced main air circulating fan installed in a furnace; a $150 cap for each qualified natural gas, propane, or oil furnace or hot water heater; and a $300 maximum for each qualified energy efficient item such as a heat pump.

To be qualified expenditures, the improvements must meet or exceed the criteria established by the 2000 International Energy Conservation Code and must be installed in the taxpayer's main home within the United States. Installation costs can be included as qualified expenditures.

To illustrate the tax credit, Robert and Sue Parker paid $3000 for new windows, $800 for exterior doors and $500 for insulation materials in 2006. The following year, they purchased a qualifying heat pump for $350. All of their 2006 expenditures are listed under Category One and are subject to 10 percent of cost with a $200 maximum on windows. As a result, the Parkers earned $330 in tax credit under IRS guidelines. ($200 maximum for windows, $80 for exterior doors and $50 for insulation.

The following year, the Parkers earned additional credit with their Category Two expenditurere $350 heat pump. Normally, the Parkers would be eligible for a $300 credit for their Category Two purchase; however, since taxpayers are only permitted a $500 maximum credit, they are only able to use $170 towards the credit.

Another credit of interest to homeowners is the Tax Credit for Residential Energy Efficient PropertySolar Fuel Cell Equipment. This section of the Act provides credit to those who add solar panels, solar water heating equipment, or a fuel cell power plant to their home within the United States. Unlike the Tax Credit for Energy Efficient Improvements to Existing Homes, the Tax Credit for Residential Energy Efficient Property Solar Fuel Cell Equipment states improvements do not have to be to your main or primary home.

Qualifying solar water-heating equipment is property to heat water in a personal residence or vacation home located within the United States. At least half of the energy used by the water heater must be used from the sun.

Solar panels, or photovoltaic property is property that uses solar energy to generate electricity for use in the home.

The IRS has determined the credit for each of these improvements is 30 percent of the qualified investment, up to a maximum of $2,000. Taxpayers may take a separate $2,000 credit for each type of system; however, each credit may only be taken once. Equipment used to heat a swimming pool or hot tub does not qualify.

A third credit under this section relates to the purchase of qualified fuel cell power plants. The credit is 30 percent of the purchase price of the qualified equipment. The maximum credit is $500 for each .5 kilowatt of capacity.

These additional credits are available for items placed in service during 2006 and 2007.

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Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

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