Federal Energy Efficiency Tax Credits Simplified

Wouldn’t it be great if the federal government rewarded you for doing the “right” thing? The American Recovery and Reinvestment Act is doing just that. Federal tax payers are allowed sizable tax credits for becoming more energy efficient and/or installing alternative energy systems. These tax credits actually reduce your income taxes dollar-for-dollar; whereas tax deductions only reduce a percentage of the tax owed.

Prior to Congress changing the law, tax credits were limited to 10% of expenses up to $500 for energy efficient home modifications, and some products had individual prices caps. (Example: $200 for energy efficient windows). Now the caps are gone and the tax credit has tripled! Under the new law, you are allowed a tax credit of 30% of your energy efficiency expenses up to $1500 incurred in 2009 and 2010 combined.

The $1500 tax credit can only be used for energy efficient improvements on your primary residence. Energy efficient windows, skylights, central air conditioners, water heaters, exterior doors, insulation, and pigmented metal roofs are all examples of qualifying improvements. A product’s manufacturer should be able to tell you if their product is eligible for the tax credit.

Here is how the credit works. If you spend $4000 on energy efficient windows in your home, you claim a $1200 tax credit on your 2009 tax return ($4000 x 30% = $1200). Being as you have not met the $1500, you can deduct $300 more in 2010 as long as you make more improvements. Let’s say you spend $5000 on a new air conditioner in 2010, you can only deduct $300 and NOT the entire 30%. You cannot deduct the 30% for the air conditioner because it will exceed the $1500 cap for expenses in 2009 and 2010.

In addition to the energy efficient tax credit, there is a tax credit for those who install residential renewable energy systems like solar water heaters, wind turbines, and solar electric systems. There is NOT a cap on the amount you can receive. You are allowed a tax credit of 30% of your total costs. (Example: $20,000 for a solar electric system x 30% = $6,000 tax credit). There is a catch. With many utility companies offering incentives for customers to install solar electric system, you have to deduct the incentive/rebate from your  cost. (Example: $20,000 system – $5000 utility rebate = $15,000 total system cost.  $15,000 x 30% = $4,500 tax credit NOT $6,000.)

PLEASE NOTE: The information in this article is intended to be current as of June 2009. NO warranty or guarantee of any kind that it is correct, complete, or wholly up to date. This article is to provide general guidance. You should not rely on this article as legal advice and should not act based on its information. Please consult a tax professional.