Tax incentives for your energy efficient home are designed to 1) encourage national energy efficiency, 2) help consumers do so without going bankrupt and 3) to assist with economic stimulus. The energy efficiency incentives work by discounting the cost of the qualified home improvements on top of the cost savings those improvements make possible through energy efficiency.
The Internal Revenue Service and U.S. Department of Energy illustrate the tax incentives for your energy efficient home on their websites. The first two of the following three energy efficiency tax incentives are reported by the IRS news wire, and are listed below. The third incentive is also illustrated via the U.S. Department of Energy. These incentives can save a tax payer almost a third of the cost of upgrading a home for energy efficiency and take the form of tax credits rather than deductions.
How to make the most of energy efficient tax credits
Making the most of tax incentives for your energy efficient home involves understanding your costs. This is because a sunk cost into an energy efficient appliance, electricity supply or home improvement usually cannot be retrieved instantly. Thus, it is 1) important to know if the cost is affordable, 2) if the savings from the energy efficient cost can be realized effectively, and 3) if the tax incentive significantly improves the likelihood of 1 and 2.
To illustrate the realization of number 3 in the previous paragraph, a homeowner decides the cost of $10,000 worth of solar panels after installation must be recovered within 3-5 years in order for it to be worthwhile. Otherwise, the cost is too high because he doesn’t plan on living in the home for more than 5 years and wants to benefit from the savings.
After taking the non business energy property tax credit, the homeowner has lowered the cost of the solar panels to $8,500 through lower federal income taxes. He later learns that a similar state tax credit exists and claims an additional $500 using that for a remaining cost of $8,000. The solar panels save the homeowner $125 per month in electricity costs which is $1,500 per year. The homeowner also claims the Residential Energy Conservation Subsidy Exclusion credit after consulting with his accountant. This additional tax incentive saves the homeowner and additional $2,800. Thus, after the first year, the homeowner has recouped $6,300 or 63% of the cost of his solar panels and expects to recover the remaining cost in approximately 2.5 years.
(1) Non-Business Energy Property Tax Credit:
The Nonbusiness Energy Property Tax credit became law in 2009 and is set to expire at the end of 2010 meaning it can only be claimed on a 2009 or 2010 tax filing. The credit assists homeowners recover the cost of energy efficient improvements to their homes. Qualifying improvements include insulation and energy efficient window and door installation among other things. The credit is good for 30% of the cost up to $1,500 according to the IRS. (IRS)
(non-business)
(2) Residential Energy Efficient Property Credit:
IRS Form 5695 can be completed to claim the Residential Energy Efficient Property Credit. The residential Energy Efficient Property Credit has a cap of $2000 in addition to a cap on the percentage cost of a home improvement. This cap is 30% of cost like the Nonbusiness Energy Property Credit. The improvements that qualify for this credit can be viewed at the energystar.gov website and include geothermal, wind and solar home electricity sources. This credit does not expire until 2016 according to the U.S. Department of Energy. This information and other details about the credit can be found via IRS Notice and applicable law.
Investment related energy efficient tax credits
The following two energy efficiency tax credits are related to investments in either energy efficiency projects or utility improvements. These tax credits allow investors to potentially increase returns on investment and homeowners to potentially recoup additions costs associated with home improvements related to the installation of specific energy efficient equipment such as solar energy systems.
(3) Energy Investment Tax Credit:
This tax credit claim is made using IRS Form 3468. Private investors who invest money in qualifying energy efficient power producing ‘projects’ can credit 30% of their investment provided that it qualifies for the tax credit. This additional credit has the potentially to positively affect retirement planning and other financial planning as provided the investment does not decline in value, the credit can be viewed as a 30% return on investment. However, for this return to be directly realized, the tax credit must also be refundable if no income tax or capital gains tax at or above 30% of the cost of the investment exists. Other ways to benefit from the Energy Investment Tax Credit is via investment in businesses that can claim this credit.
(4) Residential Energy Conservation Subsidy Exclusion
Although open to interpretation according to the Database of State Incentives for Renewables & Efficiency, the installation of solar equipment or other energy efficient wind or geothermal equipment may be tax deductible of one’s gross income thereby lowering taxable income. This interpretation is made from Title 26, Subtitle A, Chapter 1, Subchapter B, Section 136 of the US Code which is statutory law made possible via the passing of legislative acts. (section 136)
This article discusses tax incentives for your energy efficient home but the content herein does not replace the advice of a tax attorney or accountant. The four tax credits discussed are federal incentives only and do not include the entirety of tax incentives for your energy efficient home. The tax incentives discussed are contained within the law governing the Internal Revenue Service and are further explicated via the IRS, U.S. Department of Energy and aforementioned Database of State Incentives.
The Internal Revenue Service and U.S. Department of Energy illustrate the tax incentives for your energy efficient home on their websites. The first two of the following three energy efficiency tax incentives are reported by the IRS news wire, and are listed below. The third incentive is also illustrated via the U.S. Department of Energy. These incentives can save a tax payer almost a third of the cost of upgrading a home for energy efficiency and take the form of tax credits rather than deductions.
How to make the most of energy efficient tax credits
Making the most of tax incentives for your energy efficient home involves understanding your costs. This is because a sunk cost into an energy efficient appliance, electricity supply or home improvement usually cannot be retrieved instantly. Thus, it is 1) important to know if the cost is affordable, 2) if the savings from the energy efficient cost can be realized effectively, and 3) if the tax incentive significantly improves the likelihood of 1 and 2.
To illustrate the realization of number 3 in the previous paragraph, a homeowner decides the cost of $10,000 worth of solar panels after installation must be recovered within 3-5 years in order for it to be worthwhile. Otherwise, the cost is too high because he doesn’t plan on living in the home for more than 5 years and wants to benefit from the savings.
After taking the non business energy property tax credit, the homeowner has lowered the cost of the solar panels to $8,500 through lower federal income taxes. He later learns that a similar state tax credit exists and claims an additional $500 using that for a remaining cost of $8,000. The solar panels save the homeowner $125 per month in electricity costs which is $1,500 per year. The homeowner also claims the Residential Energy Conservation Subsidy Exclusion credit after consulting with his accountant. This additional tax incentive saves the homeowner and additional $2,800. Thus, after the first year, the homeowner has recouped $6,300 or 63% of the cost of his solar panels and expects to recover the remaining cost in approximately 2.5 years.
(1) Non-Business Energy Property Tax Credit:
The Nonbusiness Energy Property Tax credit became law in 2009 and is set to expire at the end of 2010 meaning it can only be claimed on a 2009 or 2010 tax filing. The credit assists homeowners recover the cost of energy efficient improvements to their homes. Qualifying improvements include insulation and energy efficient window and door installation among other things. The credit is good for 30% of the cost up to $1,500 according to the IRS. (IRS)
(non-business)
(2) Residential Energy Efficient Property Credit:
IRS Form 5695 can be completed to claim the Residential Energy Efficient Property Credit. The residential Energy Efficient Property Credit has a cap of $2000 in addition to a cap on the percentage cost of a home improvement. This cap is 30% of cost like the Nonbusiness Energy Property Credit. The improvements that qualify for this credit can be viewed at the energystar.gov website and include geothermal, wind and solar home electricity sources. This credit does not expire until 2016 according to the U.S. Department of Energy. This information and other details about the credit can be found via IRS Notice and applicable law.
Investment related energy efficient tax credits
The following two energy efficiency tax credits are related to investments in either energy efficiency projects or utility improvements. These tax credits allow investors to potentially increase returns on investment and homeowners to potentially recoup additions costs associated with home improvements related to the installation of specific energy efficient equipment such as solar energy systems.
(3) Energy Investment Tax Credit:
This tax credit claim is made using IRS Form 3468. Private investors who invest money in qualifying energy efficient power producing ‘projects’ can credit 30% of their investment provided that it qualifies for the tax credit. This additional credit has the potentially to positively affect retirement planning and other financial planning as provided the investment does not decline in value, the credit can be viewed as a 30% return on investment. However, for this return to be directly realized, the tax credit must also be refundable if no income tax or capital gains tax at or above 30% of the cost of the investment exists. Other ways to benefit from the Energy Investment Tax Credit is via investment in businesses that can claim this credit.
(4) Residential Energy Conservation Subsidy Exclusion
Although open to interpretation according to the Database of State Incentives for Renewables & Efficiency, the installation of solar equipment or other energy efficient wind or geothermal equipment may be tax deductible of one’s gross income thereby lowering taxable income. This interpretation is made from Title 26, Subtitle A, Chapter 1, Subchapter B, Section 136 of the US Code which is statutory law made possible via the passing of legislative acts. (section 136)
This article discusses tax incentives for your energy efficient home but the content herein does not replace the advice of a tax attorney or accountant. The four tax credits discussed are federal incentives only and do not include the entirety of tax incentives for your energy efficient home. The tax incentives discussed are contained within the law governing the Internal Revenue Service and are further explicated via the IRS, U.S. Department of Energy and aforementioned Database of State Incentives.
Sources:
1. http://www.irs.gov (U.S. Internal Revenue Service)
2. http://www.dsireusa.org (Database of State Incentives for Renewables & Efficiency)
3. http://www.energy.gov (U.S. Department of Energy)
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