Energy Enhancements Pay Off At Tax Time
If you made certain energy efficient improvements to your home last year, you can finally claim them on your 2007 tax return.
The Energy Tax Incentives Act of 2005 created a tax credit for some improvements that enhance a property's energy saving properties. The write-offs range from $50 for the installation of a whole-house circulating fan to $2,000 for conversion to a solar water-heating system.
But taxpayers had to hold off on making their claims until Feb. 11 because the necessary tax paperwork, Form 5695, was one of five that the IRS couldn't immediately process. The documents contained information connected with alternative minimum tax and since changes to that law were made late last December, the IRS needed the extra weeks to ensure that its computers could handle the changes.
Now, however, the millions of taxpayers who used one of these forms and who've been holding onto their returns can send them to Uncle Sam.
Eligible Energy Improvements
At least the delay should be worth it for energy-conscious homeowners. The energy efficient home improvement tax break is a credit, which is better than its counterpart, the tax deduction.
Deductions reduce your taxable income, which should lower your eventual tax bill somewhat. Credits, however, offer you a dollar-for-dollar tax savings. If you owe the IRS $1,000 and can claim a $500 tax credit, your bill is immediately cut in half.
Under the energy law, you generally can claim a tax credit for up to 10 percent of the cost f certain home improvements that make your residence more energy efficient. However, in some cases, there are more specific limits. Eligible improvements and limits where applicable include:
Improvements that earn credit
• Whole house fan ($50 limit)
• Insulation
• Window film
• Replacement windows ($200 limit)
• Exterior doors
• Metal roof treated with energy efficient paint
• Propane, natural gas or water heater ($150 limit)
• High-efficiency air conditioners and furnaces ($300 limit)
The eligible products and improvements must follow International Energy Conservation Code, or IECC, standards. In most cases, the qualifying designation will be noted on the product, usually with an Energy Star emblem, or documentation verifying that it meets IECC guidelines will be provided at the time of purchase or installation.
In addition to the more common home improvements listed, some more energy-saving -- and more costly -- solar upgrades could net you a bigger tax credit. If you install a solar-powered water heater or a solar system that generates photovoltaic electricity for your home, you can claim a credit for up to 30 percent of those costs up to a $2,000 maximum.
Dollar and time limits apply
There is a downside to Uncle Sam's support of home energy improvements.
As noted previously, the tax credit has its dollar limits. Typically, it is limited to the lesser of 10 percent of the cost of the eligible improvement or the specific dollar amount (listed previously).
In addition, there is an overall credit limit of $500 on the improvements.
Even more restrictive, that $500 limit applies to home improvements made in 2006 and 2007. So if you claimed $400 for home energy upgrades on your 2006 return, you can only claim $100 for any additional improvements made in 2007.
Taxpayers who take the solar route get a bit more tax leeway. The $2,000 credit for those residential energy upgrades is available on an annual basis. So if you put in a solar heating system in 2006 and claimed $2,000 on that return, and continued your solar upgrades in 2007, you can still claim up to $2,000 on this year's return.
There also are time limits. The general energy improvements provision expired at the end of 2007, although there is some indication that Congress would like to extend the tax credit for at least another year. The solar provision was extended, but it will expire at the end of 2008.
Related home tax issues
While a single family structure typically comes to mind in connection with "home," the IRS points out that its definition is more encompassing.
Your home is where you lived in 2007, and that may include a house, houseboat, mobile home, co-op apartment, condominium or a manufactured home. As long as one of these structures was your main residence, i.e., you lived there most of the year; eligible energy upgrades you made are eligible for the credit.
For credit purposes, notes the IRS, costs related to the credit are considered paid when the installation of the original energy efficient item is completed or, if you're building your home making substantial structural changes to an existing property, when you actually begin living in the home.
And be sure to keep a record of your improvements and associated tax credits. They could affect how much tax-free profit you get when you sell your energy-enhanced home. You must reduce the basis in your home, which is used to determine your home-sale exclusion amount, by the amount of energy-efficient credits you claim.
Article by: Kay Bell • Bankrate.com
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