As part of the 2009 American Recovery and Reinvestment Act (ARRA), the Internal Revenue Service (IRS) provided energy tax credits to taxpayers who made energy-efficient improvements to their homes or purchased an electric vehicle in previous years. The American Taxpayer Relief Act of 2012 included extensions for many energy tax credits that were scheduled to expire in 2011.
Energy Tax Credits Available
The energy tax credit is exactly that: a credit. This cannot be used to lower a tax bill below zero. The amount of credit differs depending on the type of item or improvement. Additionally, some credits include installation costs. The U.S. Department of Energy (DOE) lists the rules for permissible credits, the maximum amounts of credit and the standards for these items on its website.
Nonbusiness Energy Property Credit
In 2009 and 2010, the IRS permitted a $1,500 lifetime credit maximum for home improvements. For 2012 and 2013, this amount has been reduced to $500. These energy credits are limited to improvements for the primary residence; improvements on rental homes, vacation property, or second homes are not included in this type of credit.
Credit for Existing Primary Residences
Taxpayers can claim 10% of the improvement's cost, up to a maximum of $500. Installation costs for roofs, windows and doors are not included. Installation costs for insulation is similarly not included unless it was self-installed by the homeowner. This credit includes:
- Heating and air conditioning systems
- Water heaters
- Biomass stoves
Ineligible Home Improvements
Homeowners are not currently able to get federal tax credits for energy-efficient appliances. Items that you cannot get energy tax credit for include:
- Washers and dryers
- Ceiling fans
- Programmable thermostats
Improvements to rental properties are also excluded.
Residential Energy Efficient Property Credit
Credits for five improvements can be taken on new or existing homes through 2016; the credits need to be taken the year the improvement was installed. These items are eligible for 30% of their cost including installation - no matter the value - with no maximum to the credit amount. This credit can be used from objects installed in second or vacation homes. These items include:
- Geothermal heat pumps
- Solar panels
- Solar water heaters
- Small wind energy systems
- Fuel cell systems
The one exception is that credit for fuel cells is only available for primary homes. Taxpayers claiming fuel cells on their return receive 30% of their cost, up to a maximum of $500 for every 5 kW of power the cell produces.
There is no income limit for these credits, enabling taxpayers with high incomes to claim them. Similarly, taxpayers can use these credits to reduce their amount of alternative minimum tax, the extra tax levied in addition to the tax on many individuals' incomes.
Changes in the Law: Builder Credits
As a new change, builders can get credit for new homes that reduce energy use by 50% relative to the IECC building code. The builders may be eligible for a $2000 credit for building energy-efficient homes - either site-built homes or manufactured homes. A $1000 credit is also available to builders who build manufactured homes that save 30% more energy or that qualify for the federal Energy Star Homes program.
These credits are available for homes that were placed in service from January 1, 2006 through December 31, 2013.
Manufacturers are also eligible for credits for building qualifying models of dishwashers, clothes washers, and refrigerators. These credits are available for appliances built between January 1, 2012 and December 31, 2013.
Vehicle Energy Credits
People who purchase hybrid-electric, lean-burn (largely diesel), and fuel cell vehicles may be eligible for energy tax credits. Some of the available vehicle credits cannot be combined, while others can be simultaneously claimed. The DOE lists minimum weights and combustion system requirements on its website.
Plug-In Electric Drive Vehicle Credit
This credit is only available for new cars purchased in or after 2010, with at least four wheels. Taxpayers can claim a minimum of $2,500 plus $417 for a 5 kilowatt hour battery and $417 for each additional kilowatt hour up to a maximum of $7,500 in credit.
This credit will phase out once the car manufacturer sells more than 200,000 of the qualifying vehicles after December 31, 2009.
Plug-In Electric Vehicle
This credit originally applied to new or used low-speed vehicles with two or three wheels purchased after February 17, 2009 but before January 1, 2012; however, this credit has been extended through 2012 and 2013.
Taxpayers receive 10% of the cost up to a maximum of $2,500. This credit cannot be claimed with the Plug-In Electric Drive Vehicle Credit.
Getting Your Tax Credit
If you have made energy-efficient improvements to your home, purchased an electric vehicle or converted your car to an electric vehicle, you can claim credit on your tax return. To do so, file the IRS form 5695 with your tax return.
Energy efficiency can have a long term effect on your pocketbook. The tax credits are one way, and lowered energy bills is another.
When looking for energy-efficient appliances, look for certification which may be affixed to their product or listed on the manufacturer's website. An energy star label also identifies a product as energy-efficient. Taxpayers do not need to submit these certificates or labels with their income tax return, but should retain them for their records.
Speak to your accountant or contact the IRS for more information about these and other tax credits.