Federal Tax Credits for Energy Efficient Home Improvements

With energy costs on the rise and global resources being depleted at an alarming rate, the IRS has instituted tax credits for certain energy efficient residential property. Starting in 2006, homeowners are eligible for a 10% tax credit on qualifying residential improvements, such as exterior doors and windows. Solar panels, solar water heaters, and qualified fuel cells are eligible for a tax credit of 30% of the purchase price.

Tax Credits for Energy Efficient Home Improvements

The Nonbusiness Energy Property Credit gives homeowners a tax credit of 10% of the purchase price of certain energy efficient products. These components must meet or exceed the criteria established by the 2000 International Energy Conservation Code and must be installed in the taxpayer’s primary residence between January 1, 2006 and December 31, 2008.

The following energy-efficient components qualify for the tax credit:

  • Exterior doors
  • Exterior windows, including skylights
  • Metal roofs meeting Energy Star criteria
  • Insulation systems

Other miscellaneous items may be considered “residential energy property” and are eligible for smaller, fixed tax credits as follows:

  • $50 for each advanced main air circulating fan
  • $150 for each natural gas, oil furnace, hot water, or propane boiler
  • $300 for each item of qualified energy efficient building property

There is an annual limit of $500 for the entire credit, with a maximum of $200 allowed to be used for window expenses.

Tax Credits for Solar Equipment/Fuel Cells

Homeowners can also receive the Residential Energy Efficient Property Credit by installing solar panels, solar water heaters, or a fuel cell power plant. Qualified fuel cells convert fuel into electricity using electrochemical means, have an electricity-only generation efficiency of over 30 percent, and generate at least 0.5 kilowatts of electricity. Qualified solar equipment is eligible for a 30% tax credit, up to the following dollar limits:

  • $2,000 for qualified photovoltaic property costs
  • $2,000 for qualified solar water heater costs
  • $500 for each 0.5 kilowatt of capacity of qualified fuel cell property

These tax credits are not mutually exclusive, meaning you can take the $2,000 credit for installing solar panels and still qualify for the $2,000 solar water heater credit.

How to claim tax credits

To claim the tax credit, fill out Form 8908 (Energy Efficient Home Credit) and send it in along with your annual federal income tax return. The form can be downloaded directly from the IRS’s website at http://www.irs.gov.

You should keep all receipts from the purchase of your energy efficient equipment to support the cost claimed on your return. Also, keep any certificates you receive from the equipment vendor or installer. You may need these to verify that the energy property meets all the required criteria to qualify for the tax credit.

While the tax credits can be substantial, these energy efficient home improvements can be quite costly for homeowners. Tax savings should be considered when doing a cost/benefit analysis, but the ultimate decision on any equipment should be based on overall energy savings over the lifetime of the home. Keep in mind that you must reduce the cost basis of the home by the amount claimed for any of these tax credits, so some of the savings are offset when the home is sold.

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