Federal Tax Credits for Energy Efficiency
A federal law passed in 2005 created several significant income tax credits in an effort to promote energy efficiency. Here’s a closer look at four tax credits available to consumers.
Hybrid vehicle tax credit
A tax credit ranging from $250 to $3,400 is available to individuals who buy or lease a new hybrid (gas and electric) car. The credit is determined by a complicated set of rules, and depends on the car’s weight and fuel economy. You’ll have to rely on the manufacturer to provide you with the exact amount. The credit is available for cars purchased in 2006-2010. However, once a manufacturer has sold 60,000 qualified vehicles, the credit phases out. For popular models, the credit is likely to be unavailable after 2006 or 2007.
There are separate tax credits for qualified alternative fuel vehicles, fuel cell vehicles, advanced lean burn technology vehicles, and electric vehicles.
Note: If you bought a hybrid vehicle in 2005, you’re entitled to a tax deduction of up to $2,000.
Home improvement tax credit
Tax credits are also available if you purchase and install any of these energy-efficient products in your existing home:
Exterior windows (including skylights)—10% of the total cost, up to $200
Insulation, exterior doors, or pigmented metal roofs—10% of the total cost, up to $500
Central air conditioning, electric or geothermal heat pumps, or water heater—up to $300
Furnace or boiler—up to $150 and/or $50 for an efficient air-circulating fan
The maximum credit is $500 for all improvements combined, and applies to equipment installed in your home during 2006-2007. Equipment must meet or exceed certain specifications to qualify. You can get a summary of these specifications online at www.energystar.gov.
Solar energy systems
You can claim credits for installing solar energy systems in your home during 2006-2007. You can take a 30% credit up to a $2,000 cap for installing a photovoltaic system, and you can take a separate 30% credit up to $2,000 for solar hot water heating.
Photovoltaic systems must provide electricity for your home, and meet applicable fire and electrical code requirements. Solar hot water heating systems must use solar power to provide at least half of your home’s hot water, be certified by the Solar Rating and Certification Corporation (SRCC), and must be used exclusively for purposes other than heating swimming pools and hot tubs.
Fuel cell power plants
Homeowners are also allowed a 30% tax credit in 2006-2007 for the installation of a qualified fuel cell power plant up to a maximum of $500 for each 0.5 kilowatt of capacity. A fuel cell power plant converts fuel into electricity using electrochemical methods. Unfortunately, fuel cell technology is not yet commercially available for residences (just businesses), and may not become available during the two years this credit is in effect.
Eligibility requirements
According to the IRS, taxpayers can rely on a manufacturer’s certification that an item qualifies for a tax credit. However, you need to make sure all other qualifications are met. For example, home improvements apply to principle residences—not vacation homes—within the United States only. See a tax professional or go online at www.irs.gov for eligibility requirements.
It’s not easy being green
Even with the tax savings and lower energy costs these investments should produce, they may not always make financial sense. You should make sure the numbers add up before you buy.
Note: You may also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient vehicles and home improvements.