RMS Accounting
NEWS RELEASE

The Power of New Tax Credits


As part of a large energy law passed last year, individual taxpayers can claim a tax credit for qualified purchases to make their homes more energy efficient. Last week, the IRS issued guidance

 

Home Builders: Energy Efficiency Pays

    Under the Energy Policy Act of 2005, an eligible contractor who constructs a qualified new energy efficient home can qualify for a credit of up to $2,000. The credit is available for all new homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards.
    According to new IRS guidance (Notices 2006-27 and 2006-28), a home qualifies for the credit if:
     It is located in the United States.
     Construction is substantially completed after August 8, 2005. 
     It meets the statutory energy saving requirements.
     It is acquired from the eligible contractor after December 31, 2005, and before January 1, 2008, for use as a residence.
    In general, to meet the energy saving requirements, a home must be certified to provide a level of heating and cooling energy consumption that is at least 30 to 50 percent in the case of manufactured homes, and 50 percent for other homes below that of a comparable home constructed in accordance with the standards of the 2004 Supplement to the 2003 International Energy Conservation Code. It must also have building envelope component improvements providing a level of heating and cooling energy consumption that is at least 10 percent below that of a comparable home.
    Manufactured homes can also qualify for the credit by meeting Energy Star standards:
     Site-built homes qualify for a $2,000 credit if they reduce energy consumption by 50 percent relative to the International Energy Conservation Code standard.
     Manufactured homes qualify for a $1,000 or $2,000 credit depending on the level of energy savings achieved. The new IRS guidance provides information about the certification process that a builder must complete to qualify for the credit. It also provides a list of software programs that can be used to calculate energy consumption for purposes of obtaining a certification. Your tax adviser can provide more information.

explaining the type of home improvements that qualify for the energy credit. (IRS Notice 2006-26) As you know, tax credits are more valuable than tax deductions, because they reduce your federal (and possibly state) income tax liability dollar for dollar.

Credit for Residential
Energy Property


This personal tax credit has a $500 lifetime limit, but it's broad enough that many individuals can benefit. The credit only applies to energy-saving items you put to use after December 31, 2005 and before January 1, 2008.

The credit equals the sum of 10 percent of your expenditures for qualified energy efficiency improvements to an existing home. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States. Vacation homes are not eligible.

The following items are eligible:

  • Insulation systems that reduce heat loss or gain.
  • Exterior windows (including skylights). However, of the $500 lifetime credit, only $200 can be for windows.
  • Exterior doors.
  • Metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

  • $50 for each advanced main air circulating fan.
  • $150 for each qualified natural gas, propane, or oil furnace or hot water heater.
  • $300 for each item of qualified energy efficient property.

Additionally, the new law makes a credit available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts fuel into electricity using electrochemical means, has an electricity — only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts.

Credit for Other Residential
Energy Equipment


You can also claim a separate personal tax credit equal to 30 percent of the cost of:

 Qualified solar water heating equipment (maximum credit of $2,000).

 Qualified electricity generating solar photovoltaic property (maximum credit of $2,000).

 Qualified fuel cell property (maximum credit of $500 for each .5 kilowatt of capacity).

Note: You cannot claim the credit for equipment used to heat a swimming pool or hot tub. The credit for fuel cell property is only available for your principal residence.

 

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