Energy Tax Credits: What Are They?
Homeowners who made improvements to their homes in 2009 should check to see whether those improvements qualify for either the Nonbusiness Energy Property Credit or the Residential Energy Efficient Property Credit.
Unlike a tax deduction, a tax credit is a dollar-for-dollar credit against any federal income tax owed. For example, a $200 tax credit is deducted from the tax owed, reducing the taxpayer's liability by $200. If a refund is owed to the taxpayer, the tax credit can increase the amount of the refund.
Basic Rules for Tax Credits
There are some basic eligibility rules for both of these tax credits:
- Tax credits are only available for a home where the taxpayer lived in 2009.
- The qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.
- Each credit has a cap, depending on the materials used or property installed in the home.
- The taxpayer must reduce the basis in the home by the amount of tax credit claimed.
- If any part of the improvement was paid for by subsidized energy financing under a federal, state, or local program, that part of the cost cannot be used in determining the credit.
There are special rules for condominiums. A condominium is considered to be a home for tax credit purposes if it is used as the taxpayer's primary residence. A member of a condominium association is treated as having paid his or her proportionate share of any costs paid by the association. 26 USCA 25D(e)(6). http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000025---D000-.html
Nonbusiness Energy Property Credit
The Nonbusiness Energy Property Credit is available for certain items, such as high-efficiency heating and cooling systems, water heaters, windows, doors, and insulation. The amount of the credit is limited by any nonbusiness energy property credit the homeowner took in 2006 or 2007. This credit is not available for any portion of the home used for the taxpayer's business.
To determine if a project qualifies for this credit, the taxpayer must compare the specifications for the materials used in the project to see if they meet the qualifications for materials set forth in Internal Revenue Bulletin 2009-25 (Notice 2009-53). http://www.irs.gov/irb/2009-25_IRB/ar10.html
In addition to meeting the specifications for energy efficiency, the manufacturer must provide at least a two-year full replacement warranty at no additional cost. In the absence of such a warranty, the IRS would consider all facts and circumstances to determine if the materials qualify for the tax credit.
The tax credit is limited to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during 2009 or 2010. Each taxpayer is allowed a maximum credit of $1,500 for 2009 and 2010 combined.
To claim the credit, the homeowner would first confirm that the project was eligible. The manufacturer of each component would certify to the homeowner or condominium association that the component is an eligible building envelope component by providing the homeowner or association with a certification statement that meets the requirements of Sections 6.04, 6.05 and 6.06 of IRS Notice 2009-53.http://www.irs.gov/irb/2009-25_IRB/ar10.html#d0e589 (A manufacturer's certificate is not required for exterior windows and skylights that bear an Energy Star label if the product is installed in the region identified on the label.)
For condominium associations, 30% of the eligible costs up to the allowable credit limit would then be divided among the unit owners based on their percentage ownership interest. The association would provide each unit owner with a statement of the unit owner's allocable share of the tax credit. Each unit owner could claim up to $1,500 as a tax credit (excluding any business use of the home).
Residential Energy Efficiency Property Credit
This credit is available only for certain "qualified energy property," and there is a limit on the credit. The qualified energy property and credit limits are as follows:
- Solar electric property ($2000);
- Solar water heating property ($2,000);
- Fuel cell property ($500 for each one-half kilowatt of capacity);
- Small wind energy property ($4,000); and
- Geothermal heat pump property ($2,000).
The amount of the credit is 30% of the costs of the qualified projects, which include parts and labor for onsite preparation, assembly, or original installation of the property to the home.
Taxpayers' Returns Individual taxpayers claim these credits by attaching Form 5695, Residential Energy Credits, http://www.irs.gov/pub/irs-pdf/f5695.pdf to either their 2009 or 2010 tax return. They must claim the credit on the tax return for the year that the improvements were made. Taxpayers do not have to itemize their deductions in order to claim these credits.
Future Tax Credits?
These energy tax credits are expanded versions of tax credits from 2006 and 2007 (with higher energy saving requirements). While these current tax credits also have a sunset date at the end of 2010, they have proven to be popular with taxpayers; and Congress might very well renew or expand them in future years. The Administration maintains that energy tax credits are good for the economic recovery, as consumer demand for these tax credits can spur increased manufacturing and sale of energy-efficient products. And with Congressional elections in 2010, energy tax credits might be around well into the future.