After purchasing a home in chilly Wisconsin, Alex Wells and Curt Bjurlin wanted to amp up its efficiency by installing a wood-burning stove and Energy Star windows. By cashing in on a federal energy-efficiency tax credit, they were able to recoup $1,500 of their initial cost, and got lower utility bills to boot. When Gavin Bourjaily built his 2,050-square-foot ranch in Virginia’s mountainous Shenandoah Valley, he installed a geothermal system for heating and cooling and, after qualifying for the federal renewable-energy tax credit, got 30 percent of the investment paid back by the government.
Since 2005, the federal government has offered a variety of tax credits to help defray the total cost of residential upgrades that produce years of utility savings but require a large upfront investment. One of the two biggest credits is the energy-efficiency tax credit, which helps pay for improvements to the home shell or for installing energy-efficient heating and cooling systems. This credit is capped at $500 and is set to expire at the end of the year. The other is the renewable-energy tax credit, which covers up to 30 percent of residential alternative-energy systems, has no cap and has been extended through 2016.
The government aids in the cost of these upgrades because it pays off for both the homeowner and the nation’s economy. “Energy efficiency saves money that people can spend on things that are important for their lives, rather than just paying utility bills,” says Ronnie Kweller, director of media relations for the Alliance to Save Energy. “It’s money that helps boost the economy, so it’s a win-win-win for energy and money savings, for the economy and also for the environment.” Boosting home energy efficiency or producing power onsite also helps protect homeowners against volatile energy costs.
Applying for a Credit
If you install qualifying products before the end of the year, the credit can be applied to your 2011 taxes by filing IRS form 5695 with your taxes. A tax credit is sometimes confused with a deduction, but the two are very different. A deduction lowers your overall taxable income, while a credit is simply paid back to you. “A tax credit is much more valuable than a tax deduction because it is a dollar-for-dollar reduction in taxes owed,” Kweller says. A $500 tax credit, for example, will lower your tax burden by $500.
Products eligible for the energy-efficiency credit must be purchased and installed by December 31, 2011, in order to qualify. Only existing primary residence homes can qualify for the residential energy-efficiency tax credit. The extended renewable-energy credit is a little looser: Both primary and secondary homes qualify, as do both new and existing homes.
Residential Energy-Efficiency Tax Credit
Homeowners can qualify for the energy-efficiency tax credit by installing a variety of eligible energy-efficient products such as insulation, windows, doors, skylights, roofing, heating and cooling systems, biomass stoves and hot water heaters. For most upgrades, the credit is equal to 10 percent of the equipment cost (labor is usually not included), with a cap of $500. Some products qualify for a specific, lower dollar amount: For example, a biomass stove with a thermal efficiency rating of 75 percent qualifies for a $300 tax credit; a gas, propane or oil hot water boiler with an annual fuel-utilization efficiency of 95 percent or greater is eligible for a $150 credit.
The intention behind the tax credit is to expand the market and demand for highly efficient products, and thus only the most efficient products qualify. Windows, doors and skylights must be Energy Star labeled, and gas hot water heaters must have a thermal efficiency of at least 90 percent. Many retailers and some contractors are knowledgeable about which products qualify, or you can look up information about qualifying systems online (see Resources below).
Renewable-Energy Tax Credit
The renewable-energy tax credit has been extended through 2016, which is helpful given that these systems generally require greater planning and budgeting. Because the credit has no cap and alternative energy systems are generally expensive, the dollar value of the tax credit for these systems is typically much greater than for energy-efficiency upgrades. Solar, wind and geothermal systems qualify for a 30 percent tax credit, with no upper limit, and installation costs are included. Fuel cells are eligible for a 30 percent tax credit, up to $500 per 0.5-kilowatt hour of capacity.
Combining Local and Federal Programs
Some state and local incentives exist that can work in tandem with the federal tax credit. These opportunities vary by locale and come in the form of grants, rebates, loans and property tax incentives (for renewable-energy equipment). If you are able to produce more energy than your home uses, many electric companies will purchase excess energy, often at the retail rate. The best way to find out about such programs is to contact your state energy office, local utility or the Database of State Incentives for Renewables & Efficiency. Unlike federal tax credits, some state and local grant and rebate programs may be available only on a first-come, first-served basis. It is advisable to determine whether funding is available and how long it will take to receive it when budgeting for your project.
Tips for Using Green Tax Credits
- Act soon to qualify for energy-efficiency upgrades. The residential energy-efficiency tax credit expires at the end of 2011. The renewable-energy credit lasts through 2016.
- Ensure you are installing qualified products if you plan to claim the tax credit (many Energy Star appliances qualify; check energystar.gov for a list).
- Some qualified products may require a longer lead time because of increased demand from the tax credit, so plan accordingly.
- File an IRS form 5695 with your taxes.
- Determine whether you may also qualify for state and local incentives by visiting dsireusa.org.
- Keep in mind that the criteria for qualifying products may vary between federal and local incentives.