Matthew Accounting, PLLC
Energy Credits For HomeOwners |
On August 8, 2005, President Bush signed the “Energy Policy Act of 2005” into law. The provisions of this legislation include new tax credits for U.S. homeowners. Because these credits are rather complex with a number of limitations and are only available in 2006 and 2007, it is important for taxpayers to understand the credit limits before some salesman begins touting the tax benefits as part of the sales pitch. The credits fall into two distinct categories: (1) Energy saving improvements to an existing home, and (2) Residential energy efficient property that produces energy. If a taxpayer qualifies for the credit for saving energy and the credit for producing energy, both credits may be claimed.Energy-Saving Improvements
“Energy-saving improvements” are energy-efficient building envelope components that meet the criteria for the component established by the 2000 International Energy Conservation Code. The component must be installed in or on a dwelling unit (including a manufactured home meeting certain federal standards). The dwelling unit must be owned and used by the taxpayer as his principal residence, the improvement’s original use must commence with the taxpayer, and the improvement can reasonably be expected to remain in use for at least 5 years.
The credit for energy-saving improvements is further broken down into two sub-categories. The credits under this provision are limited to a lifetime maximum of $500.
- Building envelope components – These items in this sub-category qualify for a credit of 10% of their cost, subject to the overall credit lifetime maximum of $500, of which only $200 of the $500 limit can be from windows and skylights. Qualifying components include:
- Any insulation material or system specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit;
- Exterior windows (including skylights);
- Exterior doors; and
- Any metal roof installed on a dwelling unit, but only if the roof has appropriate pigmented coatings specifically and primarily designed to reduce the heat gain of the dwelling unit and meets the Energy Star program requirements. - Qualified energy property – These items in this sub-category qualify for a 100% credit, but the credit is limited by each qualifying item and cannot exceed the $500 lifetime limit.
- Energy-efficient building property (electric heat pump water heater, electric heat pump, geothermal heat pump, central air conditioner, and natural gas, propane, or oil water heater meeting specific energy efficiency standards). No more than $300 of the cost is credit-eligible.
- A qualified natural gas, propane, or oil furnace or hot water boiler (no more than $150 of the cost is credit-eligible); or
- An advanced main air circulating fan (no more than $50 of the cost is credit-eligible).
Click Here For Credit Flow Chart – Energy-Saving Improvements
Residential property that uses solar power or fuel cells to create electricity.
This is a personal tax credit available for the purchase of residential energy efficient property that uses solar power or fuel cells to create electricity. The credit is 30% of the qualified property cost subject to the maximum credit limitations detailed below:
- Qualifying solar water heating property - Property to heat water for use in a dwelling unit used as a main or second residence by the taxpayer, and at least half of the energy used by the property for such purpose is derived from the sun. The annual credit is 30% of the qualified property’s cost, limited to a maximum of $2,000.
- Qualified photovoltaic property - Property that uses solar energy to generate electricity for use in a dwelling unit used as a main or second residence by the taxpayer. The annual credit is also 30% of cost, limited to $2,000.
- Qualified fuel cell property - A fuel cell power plant, which is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts fuel into electricity using electrochemical means, has an electricity-only generation efficiency of greater than 30%, and generates at least 0.5 kilowatts of electricity. The qualified fuel cell power plant must be installed on or in connection with a dwelling unit located in the U.S. and used by the taxpayer as a principal residence. The credit is $500 for each 0.5 kilowatt of capacity with no annual maximum.
Limited Carryover - The portion of the credit that is not allowed because of the nonrefundable personal credit limitation may be carried to the next tax year and added to the credit allowable for that year. There is no carryforward of credits that are unused because of the $2,000/$500 per 0.5 kilowatt dollar limitations.
Click Here For Credit Flow Chart – Solar Power or Fuel Cells
Other Catches and Limitations
There are other catches and limitations that apply to these new credits:
- Installation and Payments – None of the credits can be taken until the energy credit item’s installation is complete. Therefore, expenses paid in 2006, where the installation was not completed until 2007, will not be counted as paid until 2007. Under this rule, installation that is completed after 12/31/2007 would not qualify for the credits.
- Nonrefundable and AMT Issues– These credits are nonrefundable personal credits. Thus, if they exceed your tax liability, the excess is not refundable. Nonrefundable personal credits will no longer offset the Alternative Minimum Tax (AMT) after 2005. So, without Congressional action, these credits will generally not benefit anyone to the extent they are subject to the AMT.
- Jointly-Owned Property - Special proration rules apply in the case of jointly-owned property, tenant-stockholders in cooperative housing corporations and condominiums.
- Mixed-Use Property - If less than 80% of the property is used for non-business purposes, only that portion of expenditures that is used for non-business purposes is taken into account. Thus, if the business use of a dwelling unit, such as a home office, is 20% or less, the full amount of the expenditures is eligible for the credit.
- Subsidized Financing – Expenditures made from subsidized energy financing are ineligible for the credit.
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