Tax Breaks for Conserving Energy

Dear Friends,
With gasoline prices stubbornly hovering around $3.00 a gallon and home heating costs expected to jump as much as 50 percent this winter, “energy conservation” is once again in vogue. It just so happens that back in early August — well before hurricanes Katrina and Rita wreaked havoc on gulf oil and natural gas facilities — Congress passed and President Bush signed the “Energy Tax Incentives Act of 2005.”

This massive piece of legislation took four years and went through numerous revisions before becoming law. Critics complain that the lion’s share of the $14.5 billion in tax breaks go to energy producers and businesses, with the crumbs falling to consumers.

Nonetheless, you can potentially save yourself a few thousand dollars by taking some steps to reduce the amount of energy you use in your home and vehicles. If these happen to be changes you were planning to make anyway in order to reduce your energy bill, the “gift” from Uncle Sam is icing on the cake.

As far as consumers are concerned, all of the tax breaks in this Act come in the form of tax credits, which is a dollar-for-dollar reduction of your federal income tax. You simply subtract the amount of the credit from your tax bill. And, unlike a lot of other tax breaks, these credits don’t phase out as your income rises, which makes them especially attractive to higher income taxpayers.

But I have to warn you, qualifying for these tax credits is going to take some energy on your part! There are very specific guidelines as to what is eligible for the credits. So before, say, you install a new hot water heater, make sure it’s on the list.

At this point, the most important thing is to not rush. That’s because these tax credits don’t kick in until January 1, 2006. Installing that new, energy-efficient hot water heater this year will certainly reduce your monthly utility bill, but it won’t do diddly in terms of reducing your income tax bill.

The key is the date on which the installation is completed. It’s fine to have your contractor start the work this year provided the work is finished next year or in 2007. In fact, there’s a good chance contractors are going to get backed up, so you might want to get on a waiting list now, but stipulate that the equipment cannot be “placed in service” until after December 31, 2005.

Be careful about pushing the envelope on this. George Jones, a tax analyst with CCH, says some individuals in the air conditioning industry are arguing that this would allow a consumer who lives in the northern part of the country to install a new A/C system now because it won’t actually be “used” until next year. In Jones’ opinion, “That’s a stretch.”

Keep in mind that if you’re audited, the IRS is going to want to see a copy of your dated invoice.

Timing is important for another reason: most of these tax credits are only available for two years, meaning your purchase or installation must be made in 2006 or 2007.

In addition to tax incentives designed to nudge us to use less energy in our homes, there are tax credits for buying certain fuel-efficient vehicles. These credits will replace the current tax [deduction] of up to $2,000 available on qualified cars or trucks through the end of this year. I’ll tackle the tax credits for vehicles in my next column; this week I’ll cover the tax breaks available for making your home more energy-efficient.

For starters, there’s a $300 tax credit for installing equipment that uses less energy to heat or cool your home. This includes central air conditioners, heat pumps, and water heaters. You can get a credit of up to $150 for energy-efficient gas or oil furnaces. In all cases, the credit only applies to new equipment that meet certain specifications (see table below).

You’re also eligible for a tax credit if you improve your home’s ability to hold heated or cooled air. This includes adding insulation, replacing exterior doors, sealing ducts.

For instance, if your garage is attached to you house and you install insulated garage doors, you’ll get a tax credit equal to 10 percent of the price, up to a maximum of $500.

Replacing old, leaky windows will also qualify. But you can also get a tax break if you install a new window that meets the requirements for energy efficiency. This has (probably unintentionally) provided a potential boon for folks who install skylights.

That’s because under the law, a skylight is considered a “window.” According to CCH’s Jones, because the tax credit in this bill applies to both new as well as replacement windows, “it’s possible for people to install new skylights in their roofs and claim the credit for that.” Just keep in mind that the maximum credit on all window installations is 10 percent of the cost, up to $200.

If you’re in the market for some new appliances, consider buying them after the first of the year. There are three different tax credits available for new refrigerators. The amounts range from $75 to $175, depending upon the amount of energy the new model saves compared to the federal standard.

You can shave $100 off the price of a new washing machine (for some reason, there’s no tax credit for dryers) that carries the “Energy Star” label indicating it meets stricter federal guidelines for energy consumption. Dishwashers are also eligible under the Energy Star program, although the exact size of the credit is yet to be determined.

Although appliances don’t have to meet the tougher Energy Star requirements until 2007, expect to see more and more displaying the label. That’s because the Energy Incentives Act includes also tax breaks for manufacturers who accelerate production. Bill Prindle, deputy director of Energy Policy at the American Council for an Energy-Efficient Economy (ACEEE), says manufacturers who can meet the specifications ahead of schedule will receive a tax credit for each appliance produced. The hope is that this savings will be passed to consumers. (Don’t hold your breath.)

The maximum tax credit you can get for any combination of the items above is $500.

Solar energy devices fall into a completely different category and the potential tax credit is significantly higher. As Rhone Resch, president of the Solar Energy Industries Association points out, this Act provides “the first solar generation tax credit in a generation.”

Essentially the government will cover 30 percent of the cost of installing a solar water heating system or photovoltaic (solar electricity-generating) system [or both]. The maximum tax credit is $2,000 per system, or a potential $4,000.

Unlike the exacting requirements for other types of energy conservation products, the only thing a solar hot water system needs in order to qualify for the credit is a label saying it is “SRCC certified.” That indicates it has been approved by the Solar Rating and Certification Corporation.

According to Resch, any photovoltaic system is eligible.

To be sure you’re working with a reputable solar energy installer, look for one that’s a member of the North American Board of Energy Practitioners.

But don’t start dreaming of crisp winter nights in your solar-heated hot tub. Solar devices for heating swimming pools and hot tubs are not eligible for any tax credit. Sonya King, an editor of “Tax Facts,” says Congress was “trying to stay away from things that are too much fun.”

If you’re nervous about “going solar” rest assured this does not mean quitting other energy sources cold turkey.

Instead, think of a solar energy system as a hybrid engine for your house. In the case of a water heater, Resch says you can expect the sun to provide about 70 percent of the energy needed, with another energy source such as natural gas picking up the difference. This will vary during the year depending upon your sun exposure.

Resch insists “there’s no compromise in lifestyle by installing solar.” When you install a photovoltaic system, you’ll still be connected to the electric grid in your area. If the energy collected from the sun can’t provide all the power your home needs, your system will seamlessly switch over to drawing power from the local utility.

“Right now most people are ‘renting’ their electricity from the local utility company and every month they’re raising the rent,” says Resch. “You now have the opportunity to own your own electric generating system and lock in your cost of energy for the next 25 years.”

And the federal government will help pay for it. Not only that, a number of states- including New Jersey, California, Rhode Island, and Hawaii- offer state tax incentives to homeowners who install solar energy systems.

Here’s a rundown of all the tax credits you can get for upgrading the energy efficiency of your home:

“Qualified” Product: Residential Tax Credit

Heat pump: $300

Central air conditioner: $300

Water heater: $300

Gas/oil furnace: $50-150

Gas/oil boiler: $50-150

Insulation, duct sealing, : 10 percent up to $500

Exterior doors

Windows/Skylights: 10 percent up to $200

Pigmented metal roof: 10 percent up to $500

Appliances:

Refrigerator: $75-175

Clothes washer: $100

Dishwasher: To be determined

Total amount of tax credit from above sources: $500 (a)

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Solar water heater: 30 percent up to $2,000

Solar voltaic equipment: 30 percent up to $2,000

Total amount of tax credit from solar energy installation is $2,000 per system. (b)

Source: (a) ACEEE; (b) SEIA

For additional details about the standards that must be met for a product to qualify for a tax incentive, click on this link to the American Council for an Energy-Efficient Economy: http://aceee.org/press/Tax_incentive05.pdf

Next week: how to qualify for a tax credit on a new energy-efficient vehicle.

Hope this helps,

Gail

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