How to Get a Tax Credit While Improving Your Home's Energy Efficiency

Summary: The IRS is offering incentives to make energy efficient improvements to your home. With Texas heat - these are some great ideas on how you can lower your Texas electric bill. But these come with strings and caveats. Be sure that what you are planning will qualify before you commit to the expenditure.

Uncle Sam is on your side when it comes to offering some tax credits for improving your home's energy efficiency. Unfortunately, he's only offering some credits and these come with a handful of strings. Still, a tax credit is better than no tax credit.

First, you need to know that energy tax credits can total 30% of expenditures (existing homes only for - windows and doors, metal roofs, insulation, asphalt roofs, ventilating, heating, and air conditioning systems [known as HVACs], non-solar water heaters as well as biomass Stoves) up to $1500 over a 2-year period (tax years 2009 and 2010). The credit is NOT for each year. Further, it is NOT for each adult owner of the home, unless they file separate income tax returns. A husband and wife filing a joint return, for example, could receive up to a single $1500 credit. Two adults (married or living together in the same home) could receive two such credits if they filed separate returns.

There are also longer-term and unlimited tax credits (30% of the cost, with no upper limit through 2016 for existing homes & new construction) for geothermal heat pumps, solar water heaters, small wind energy systems, solar panels, and fuel cells. However, the tax credit for fuel cells is limited to $500 per .5 kW of power capacity.

Note, too, that installation costs are only allowed for windows, doors, roofs and insulation.

And, to keep the confusion to a dull roar, you can only claim the tax credit for up to what you owe in taxes. Thus, if after other deductions you owe no taxes (even if you had tax payments withheld), you cannot claim the credit. And, if you don't owe enough taxes, you cannot carry over the credit (unless you install the items under "longer term" described above.

The good news is that you can claim both the $1500 credit and the unlimited credit as long as you satisfy the requirements for each.

Next, you will need to ensure that what you are doing qualifies for the credit. It's best to check with the company (or the manufacturer's web site) to ensure that they can provide a "Manufacturer's Certification Statement." The MCS is a signed statement that comes from the manufacturer, which certifies that the product is qualified for this tax credit. As with anything involving the IRS, be sure to save all receipts and the MCS, just in case the IRS requests them.

When you file your taxes, be sure to include a Form 5695. On the latest draft version of the form, the energy tax credit appears on line 52.

If you are thinking about this credit as a way of helping to offset the costs of viable energy-efficient home improvements, then you should visit the Energy Star web site to get more information. Check back periodically as the web site managers seem to be doing a good job of keeping information current and addressing questions. The web site's address is

http://www.energystar.gov/index.cfm?c=tax_credits.tx_index

You might also want to read the IRS rules carefully and check with your tax advisor/accountant, if you have one.