Guide to Tax Credits for Energy-Efficient Home Improvements

The government issues tax credits for people making certain home improvements to their home. The reasoning behind this is that the whole economy benefits from saving precious sources of energy. Additionally, money saved from energy efficient home improvements can be spent elsewhere, which stimulates the economy. This article will explore the government tax credits that are issues for energy-efficient home improvements. The government tax credits do not decrease your adjusted gross income. They work another way. They actually decrease from the amount of taxes you owe to the federal government. You fill out the IRS Form 5695, and subtract the amount at the bottom of the form directly from the taxes you owe. You need to have a receipt to be able to use the tax credit. What are some of the government tax credits issues for energy efficient home improvements?

1. Solar hot water. The great thing about this energy efficient home improvement is that if you end up not owing as much in taxes as the credit, you can carry over the remainder to the next year. This is because solar hot water is considered a renewable energy system. For solar hot water, you get credit for up to 30 percent of the expense of the project up to a $2000 credit. Your solar hot water system has to receive certification from the SRCC (Solar Rating and Certification Corporation). The system also cannot be hooked up to a swimming pool or hot tub, and must crank out at least 50 percent of the home’s total hot water.

For all of these home improvements, the best way to see if they make sense in a cost/ benefit analysis is to talk to an energy rater. This person can determine how much money you will save over the course of a year by plugging numbers into a computer program. This will help you decide if it makes sense to make the investment. If you will save $400 per year for the next five years, and it costs $1000 to install a system, then it’s definitely worth it, even without the tax credit to boot.

If you don’t use an energy rater, you’ll have to calculate the savings yourself. You can use the Energy Star official website to find resources and calculators for determining your savings. In general, you can assume that your energy bills will decrease about 25 to 30 percent with energy star products in your home.

If your tax credit for the solar hot water system is $2000, and you spend $6,500, you’re down about $4,500. You would have to be able to make up this amount in energy bill savings for the system to be worth it. If your bill is $300 for energy costs and it decreases to $220, you save $80 per month for a savings of $960 per year. It will take you almost five years to recoup your investment. However, the savings will go beyond the five years, and you’ll be helping out the environment.

2. Solar Electric, which is also called PV’s. You would be installing PV panels in your home. These are also considered renewable energy systems and receive the same tax credit consideration as solar hot water systems. You can get a credit of up to $2000 for up to 30 percent of the cost of the project. This tax credit can also be carried over into a future year if necessary. Just make sure the solar electric creates the energy for the home, and is compliant with electrical and fire codes.

Any way you look at it, installing solar cells is going to be worth the effort. You are providing a source of renewable energy that will last in years to come. You are helping the environment by using less energy for electricity and lights. Because you save up to 30% of the investment in the form of a tax credit, you only need to save the additional 70% of the cost over time to make it worth while. This doesn’t usually seem to be a problem for many homeowners, especially given the increasing costs of energy, especially electricity. One thing to keep in mind with PV’s is that PV’s can have batteries that can be used as a backup if the sun didn’t offer enough energy for a certain energy need.

3. Fuel cells. The tax credit is up to 30 percent of the cost of the fuel cell project, up to a maximum of $1000 per kilowatt of power that is generated. The overall fuel cell has to at least be capable of up to .5 kilowatts of energy, and it has to have an efficiency of at least thirty percent.

To determine whether it’s worth it with a cost/ benefit analysis, simply subtract the tax credit from the cost, and then determine how much you will save each month on your energy bills. If you can save money over a few years, the project was worth it.

4. Windows and doors. The maximum tax credit is $200 for each one, up to $500 total. You have to purchase an Energy Star window or door and have it installed. Skylights and storm windows can qualify. In a new home, it will always be worth it to put in Energy Star windows and doors, because the cost isn’t much more than a regular window or door. And, you will get the tax credit. With older homes, you have to pay for something that wouldn’t have been done, so the savings takes longer to accrue and realize. With older homes, you have other options for how to save energy that could cost you less money.

For me, it seems as if it would always be worth it to have Energy Star windows and doors. You will save money and recoup the investment. But there are also other benefits, such as not feeling cold air through the windows that comes through windows that are not energy efficient. It is important to note that this tax credit is expiring in 2008, so you have to use it now to benefit or the credit will no longer be available.

5. HVAC, which is heating, ventilation and air conditioning. This is another energy efficiency project whose benefits are short lived. The tax credit will end in 2008. You can get up to a $300 credit. An example of HVAC is an air source heat pump. To decide if the project makes sense financially, consider if the tax credit plus the energy savings each month will be greater than the cost of the project.

Any time you install an energy efficient home improvement item in your home, you increase its overall value. Consider this, that your home may sell for more when you decide to move. You’re protecting the environment, and you’re also stimulating the environment when you have the work done.

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