Although the U.S. government's ability to function is heavily dependent upon tax revenue, taxpayers are not completely forgotten about. In fact, the government offers taxpayers breaks for taking certain actions or making certain purchases that are good for themselves, the economy or the environment. One such break is a tax credit available to homeowners who make energy-saving home improvements and upgrades.
Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making home energy improvements. Some of these home energy tax credits will continue to be allowed for the 2011 tax year and beyond, although most are lower than the last two years. Nevertheless, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.
Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making green energy improvements. These credits will continue to be allowed for the 2011 tax year, although they are lower than the last two years at just $500 for the lifetime of the taxpayer. Despite this, however, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.
The Benefit of Claiming Tax Credits
Unlike a tax deduction, which only lowers your taxable income by the amount of the deduction, a tax credit – as its name suggests – is a credit toward the taxes that you owe. In other words, it is a dollar-for-dollar reduction in tax liabilities. For example, if you owe $1,200 and receive a $500 tax credit, you will only owe $700 on your tax bill. In some cases, tax credits may result in your receiving a refund under circumstances in which you may otherwise have owed money.
Changes to Some Home Energy Tax Credits in 2011
While the good news is that some residential energy tax credits that were set to expire at the end of 2010 are being extended through 2011, the bad news is that there is now a total lifetime cap of $500 for the following energy-efficient improvements:
- Heating, Ventilating & Air Conditioning (HVAC) Equipment – Includes furnaces, boilers, air source heat pumps, advanced main air circulating fans and central AC. (Central AC capped at a $300 credit, electric heat pumps capped at a $300 credit, furnaces and boilers capped at a $150 credit, main air circulating fans capped at a $50 credit)
- Insulation – Typical bulk insulation products, such as batts, rolls, blow-in fibers, rigid boards, expanding spray and pour-in-place, as well as many products designed to air seal, such as weather stripping, caulk, house wrap and spray foam in a can, are included.
- Metal & Asphalt Roofing – Metal roofs are required to have appropriate pigmented coatings, asphalt roofs are required to have appropriate cooling granules, and installation costs are NOT included.
- Non-Solar Water Heaters – Includes qualified natural gas, propane or oil furnaces and hot water boilers. (Furnaces are capped at a $200 credit and must be 95% efficient.)
- Energy-Efficient Windows, Doors & Skylights – Also includes storm windows and doors. (Credits for windows are capped at $200).
- Biomass Stoves – Must have a thermal efficiency rating of at least 75%. Biomass stoves can burn agricultural crops, wood, plants, grasses, residues, and fibers. (Credits for biomass stoves are capped at $300.)
The $500 lifetime cap is a rather significant reduction from the $1,500 cap that existed previously. This means that if you have already received at least $500 total in energy tax credits through 2009 and 2010, you are no longer eligible to claim these tax credits. On the other hand, if you have only claimed a portion of the $500 threshold so far, you are still eligible to claim the remainder of it as long as you make qualified improvements before the end of this year. For example, if you have only used $300 in credits, you still have $200 left for 2011.
Another major change to these energy tax credits this year is that it only extends to 10% of the cost – down from 2009 and 2010, when it was 30% of the cost – so you will need to spend $5,000 in order to receive the full $500 tax credit. However, if you are already planning to make some of these qualifying energy-efficient home improvements discussed above, it is in your best interest to make these changes before the end of 2011. If you are not already planning to upgrade at this time, you may want to consider how much money you will save long-term by upgrading to an energy-efficient appliance sooner rather than later.
If you are eligible for the aforementioned energy tax credits, you must complete any qualifying home improvements before the end of this year in order to receive these tax credits as they will expire on December 31, 2011.
Eligibility Guidelines for the Home Energy Tax Credits Discussed Above
It is important to be aware of the many rules and restrictions limiting what is eligible for the energy tax credit and how much you can claim. You will certainly not want to get to the end of the year thinking that you have tax credits, only to discover that you have purchased and installed ineligible systems.
The residential energy tax credits are a bit complicated in that:
- Improvements must be made to an existing home
- Improvements must be made to your principal residence
- Only certain home improvements are eligible
- Only certain appliances and systems are eligible
- There are individual caps on many items.
Home Energy Tax Credits Through 2016
Fortunately, many residential energy tax credits will not expire till December 31st, 2016. These include geothermal heat pumps, small wind turbines and solar energy systems, as well as residential fuel cell and microturbine system installations. The first three aforementioned home improvement energy tax credits have no upper limit or cap and can get you a tax credit of up to 30% of the total cost (including installation costs). For residential fuel cell and microturbine system installations, you can obtain a tax credit for 30% of the total cost (including the installation) up to $500 per .5kW of power capacity.
Eligibility Guidelines for Home Energy Tax Credits Through 2016
Just like the other home energy tax credits expiring this year, there are some limitations on the energy tax credit. However, these limitations are much less restricting. Here are the major differences in the limitations:
- Improvements may be made to an existing and new construction homes
- Improvements may be made to your primary residence and your second home (except for fuel cells which only qualify for your primary residence)
- There are no individual caps.
Claiming Energy Tax Credits on Your 2011 Tax Return
In order to claim energy tax credits on your 2011 tax return, you must take the following steps:
- Plan your home improvements wisely and consult the ENERGY STAR website to see which improvements are eligible to claim, and whether you can claim installation costs for certain systems and improvements
- Keep your receipts and Manufacturer's Certification Statements in a special folder so that you can add them up at the end of the year. You must be very clear about which items you purchased during the year.
- Record your spending on IRS Form 5695 and submit it with your 2011 tax return. On IRS Form 1040, the residential energy tax credit is claimed on line 52.
You can obtain more information, eligibility requirements and other details on qualifying products at both Alliance to Save Energy and ENERGY STAR. Or consult a tax professional to see how you may be able to benefit from the residential energy tax credit, as well as the many other tax breaks available.
For you, as the taxpayer, making home improvements that save energy creates a win-win situation, where not only will you reap a short-term benefit by receiving the tax credit, but you will also enjoy the long-term advantage of saving a great deal of money on your energy bills.
This guest post was provided by Manny Davis. His website contains a frequently updated tax blog with tax news, tax changes and tax saving tips, as well as detailed guides to help people through various tax related problems.