Light Turns Green on Tax Credit for Energy Efficient Home Improvements

The American Recovery and Reinvestment Act of 2009 reinstated and increased the tax credit for energy efficient home improvements for two years beginning on January 1, 2009.

Four years ago, Congress passed the Energy Tax Incentives Act of 2005.  A provision of that Act established a $500 tax credit for energy efficient improvements made to your primary residence.

"The pre-2008 rules allowed you to claim a tax credit equal to 10% of the money spent on the installation of certain energy efficient improvements to your principal residence including insulation and exterior windows, doors, and skylights.  You could also take a tax credit for 'qualified energy property' including up to $50 spent on circulating fans, $150 on furnaces or hot water boilers, and $300 on heat pumps, water heaters, and central air conditioning," explains Andrew Schwartz CPA, founder of FindAGoodCPA.com (www.FindAGoodCPA.com), a site where taxpayers can locate a tax professional in their metropolitan area based on the professional's specialty.

The credit only applied for purchases made during 2006 and 2007, and was limited to a lifetime max of $500 per dwelling, with no more than $200 of the credit to be taken for replacement windows.  While other tax breaks included in the Energy Tax Incentives Act of 2005 were subsequently extended, this tax credit expired as originally planned on December 31, 2007.

Renewed and Improved:

The American Recovery and Reinvestment Act of 2009 reinstated and improved this tax credit for two years beginning on January 1, 2009 as follows:

• Tripled the rate of the credit - from 10% to 30% for 2009 and 2010.

• Tripled the maximum credit - up to $1,500 per dwelling for qualified expenditures made during 2009 and 2010.

• Eliminated the cap of $50 to $300 on items such as circulating fans, furnaces, hot water boilers, heat pumps, water heaters, and central air conditioning. 

• Eliminated the $200 cap on the portion of the tax credit applicable to the installation of energy efficient windows. 

Two-Year Replacement Window

The new rules give you through December 31, 2010 to purchase energy efficient improvements for your home and qualify for this tax break.  The maximum credit is now equal to 30% of the first $5,000 spent on high-efficiency heat pumps, air conditioners, and water heaters, or energy-efficient windows, doors, insulation materials, and certain roofs. Starting in 2009, you can also claim the credit for certain types of asphalt roofs and stoves that burn biomass fuel.

Looking for more good news?  Even if you claimed the $500 tax credit a few years back for energy efficient improvements made to your home, you can still claim the full $1,500 tax credit for 2009 and 2010 as long as you make $5,000 worth of qualified energy efficient expenditures during that two year period.

Please note that the new rules did increase the standards for an energy efficient purchase to qualify for this tax credit.  Expect the IRS to issue guidance for manufacturers to certify that their products meet these new standards. 

According to our friends at the IRS in IR-2009-44, "IRS guidance issued before the enactment of ARRA will be modified in the near future to reflect the new energy efficiency standards. In the meantime, homeowners may continue to rely on manufacturers’ certifications that were provided under the old guidance and on Energy Star labels for exterior windows and skylights in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards."

Renewable Options

Thinking about adding solar, wind, or geothermal capabilities to your home? If so, you should be aware that the 2009 Tax Act also improved the tax credit for purchases of solar electric property, solar water heating property, wind energy property and geothermal heat pump property.  Under the prior rules, the tax credit you could claim for most of these items was capped at $2,000 per dwelling. 

As of January 1, 2009, these limits no longer apply.  Through 2016, you can take a tax credit equal to 30% of your expenditures for qualified solar, wind, or geothermal property.  Plus, you can claim the credit even if you add this energy producing property to a home that is not your primary residence.  According to IRS Notice 2009-41, "a qualifying dwelling unit is a dwelling unit that is located in the United States and is used as a residence by the taxpayer." 

The Light Turned Green

What does green mean to you?  Being environmentally friendly?  Stashing some Ben Franklins in your piggy bank?  Or setting the wheels in motion?

"Whatever your definition of green, the clock is ticking for you to benefit from the current tax credit available to individuals who make qualified energy efficient improvements to their home," says Schwartz.

About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of www.FindAGoodCPA.com, a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare, real estate professionals, and lawyers. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.