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Tax credit for energy-efficient home improvements

May 18, 2009

A new federal tax credit allows homeowners to recoup part of the cost of certain energy-efficient home improvements.

The tax credit can be claimed for such improvements as energy-efficient doors, windows, insulation, roofing materials, heating ventilation and air-conditioning (HVAC) systems, solar panels, solar water heaters, geothermal heat pumps, fuel cells and even small wind-energy systems.

The tax credit was originally enacted late last year and was updated and expanded in 2009's economic stimulus package.

How to take advantage of the energy-efficient tax credit
Homeowners can receive a tax credit of 30 percent of the cost of energy-efficient home improvements, up to a two-year maximum credit of $1,500. Like all tax laws, the rules are somewhat complicated. For example, the $1,500 cap doesn't apply to geothermal heat pumps, solar water heaters, solar panels, wind generators or fuel cells, which are more costly.

In addition, only certain types of energy-efficient products qualify for the tax credit. For some products, only the cost of materials can be claimed while for other products, both materials and installation costs can be claimed. Some of the products must be installed in the taxpayer's principal residence. Others can be installed in a new-built home, second home or residential rental property.

The tax credit can be claimed for home improvements made from Jan. 1, 2009, through Dec. 31, 2010. A tax credit is particularly valuable because, unlike a tax deduction, a credit is subtracted from the total tax that's owed, not just the income that's reported. That means the benefit is dollar-for-dollar, instead of a percentage of the deduction. Be sure to save the Manufacturers Certification Statement to document the energy-efficiency rating for each product that's purchased and installed in your home.

Research tax credit before making home improvements
It’s a good idea to do some research before you decide to make home improvements that may qualify for the tax credit. You might want to ask a qualified tax professional to give you more information about the tax-credit rules or you might want to explore the federal government's EnergyStar website to learn more about energy-efficient products. Note that not all EnergyStar-rated products qualify for the tax credit.

Homeowners also can make other improvements to make their home more energy-efficient. Ceiling fans, programmable thermostats, and energy-saving appliances and light bulbs are a few examples. These improvements don't qualify for the federal tax credit, but can save energy and lower the home's energy costs. That's particular smart for older homes since they tend to be especially susceptible to inefficient energy use.

 

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