Using The New Energy Tax Credits

I heard about the new tax credits for home energy-efficiency improvements. How long are they effective and what is covered? Will they save enough to make improvements worthwhile?—Paul N.

In my opinion, the credits are not large enough to provide a real incentive for energy-saving improvements unless they were already planned.

One problem is people may not realize these are tax credits and not tax deductions. A tax credit reduces your tax bill by the amount of the credit. A tax deduction reduces the taxable base, so the savings depends upon your tax bracket. In the 25 percent bracket, a $500 tax credit is equivalent to a $2,000 income. The tax credit amount is listed on line 52 of federal tax form 1040.

You must also complete form 5695 to calculate the tax credit.

The Energy Policy Act of 2005 covers most typical home energy conservation improvements. These include insulation, replacement windows and improvements, doors, metal roofing, heating and cooling systems, water heaters, and solar systems.
In most cases, improvements must meet the 2000 International Energy Conservation Code specifications. Most contractors can tell you which products and improvements meet these specifications.

The energy act was enacted for only two years, so improvements must be installed before the end of this year. Congress might expand and extend the credits past 2007.

There are limits on the amount of the tax credit depending upon the improvement. Many of the tax credits are for approximately 10 percent of the installed cost, but some are substantially less. You can get a one-time income tax credit of up to $500 total for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment. These tax credits expire at the end of 2007.

There are also new tax credits for installing alternative fuels and heating, which provide 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, excluding pool heating. Alternative energy credits were extended through 2008. For many homes the economic payback on alternative fuels is relatively long. Solar water heating is the exception, where it is economical for most homes.

Door improvements provide a higher maximum tax credit than replacement windows. In general, replacing windows will save more energy, but is more expensive. 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 the new metal roofing materials. Metal roofs last a lifetime, and you will receive a $500 tax credit. Metal roofs block heat from the summer sun, lowering air-conditioning use. 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. Make sure the efficiencies of the heat pump 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 cost several hundred dollars more than standard blower motors.

If you have an electric water heater, you can get a $300 tax credit by installing a heat pump water heater.

For more on energy tax credits, visit the Alliance to Save Energy Web site: www.ase.org/content/article/detail/2654.