Comfort Line - Questions and Answers

This quarter our Questions and Answers segment discusses energy tax credits.

What tax benefits are available for energy-saving improvements to the home?

There are two different tax credits for residential energy- saving improvements. One credit is for energy efficiency improvements to the structural elements of a home, such as windows, insulation and the purchase of high-efficiency heating, cooling and hot-water- making equipment. The second credit is for renewable energy sources, including solar, wind, geothermal and fuel cell technology. Recent tax legislation, known as the American Recovery and Reinvestment Act of 2009, made several important changes to these credits that make them more beneficial to the homeowner.

How does the energy efficiency tax credit work?

The new law increases the energy efficiency tax credit from 10% to 30% of the qualifying cost of improvements that make a home more energy efficient, such as windows, insulation and qualifying high-efficiency heating, cooling and hot- water-making equipment. In addition, the cap on the maximum credit was increased from $500 to $1,500. This credit applies to all applicable improvements made during 2009 and 2010. The new law also extends the credit to cover equipment that uses renewable biomass fuels. Appliances such as refrigerators, dishwashers and washing machines are not eligible.

How does the renewable energy equipment credit work?

The law allows 30% of the installation cost of renewable energy equipment to be taken as credit against federal income tax. Qualifying equipment includes solar systems that make electricity or hot water, fuel cells, wind turbines and geothermal heat pump systems. Prior to 2008, this credit was generally capped at $2,000. The new law removes the cap and extends the credit through 2016. For example, if you install a solar domestic hot-water-making system, you can recover a full 30% of the cost from the federal government in the form of a tax credit.

How does a tax credit differ from a deduction?

Deductions decrease your taxable income, which means that the benefit you receive depends on your marginal tax rate. For a taxpayer in the 30% tax bracket, a $3,000 deduction would save $900 in tax. A credit, on the other hand, gives you a dollar for dollar reduction in your tax liability. A $3,000 credit to the same taxpayer would save $3,000 in tax.

For more information about these credits, speak with your tax advisor, call us at 973-383-1421 or visit www.energytaxincentives.org.