How to Cut Your Utility Bills While Reducing Your Taxes

How would you like to get paid to reduce your utility bills? You can do that by taking advantage of tax credits now available for making energy improvements to your home. Generally, you’ll be able to claim a tax credit of 30% of the cost of the improvements, which will also lead to lower energy consumption resulting in lower utilities bills. This is a win-win deal for energy-conscious taxpayers.

The home energy credits are for specific energy improvements that are broken down into two distinct groups, one for making efficiency improvements and the other for tapping solar, wind and geothermal energy sources. Although they both provide a 30% tax credit, each has its own specific list of items that qualify for the credits, overall credit limitations, and years in which the credits are effective. These credits are available for dwellings located within the United States.

• Residential Energy Property Credit – The name Congress gave to this credit is not as descriptive as it could have been and is easily confused with other credits. This credit is for energy-saving improvements to a taxpayer’s principal residence. The credit is limited to $1,500 (30% of up to $5,000 of qualified expenditures) for improvements made in 2009 and 2010. Qualified improvements, the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include:

o Energy-efficient Exterior Windows and Skylights;
o Energy-efficient Exterior Doors;
o Energy-efficient Metal Roofs with appropriate pigmented coatings;
o Energy-efficient Asphalt Roofing with appropriate cooling granules;
o Energy-efficient Heating Systems;
o Energy-efficient Air Conditioning Systems; and
o Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for onsite preparation, assembly, or the installation of the component. The credit is a nonrefundable personal credit; thus, the credit can only be used to bring your tax (including the alternative minimum tax) down to zero. Any excess is not refundable and cannot be carried over to a subsequent year.

Of course, the question is how does one determine whether or not a specific manufacturer’s component qualifies as “energy efficient”? Each manufacturer must comply with the government’s established standards for the product to be qualified as "energy efficient.” And each manufacturer who meets those standards will provide a written certification that a taxpayer can rely upon for purposes of the credit. Although the IRS is planning to issue new guidance to manufacturers for their certifications, taxpayers may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009 qualifies for the credit.

• Residential Energy-Efficient Property (REEP) Credit – This is a 30% tax credit for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. These all represent major home modifications and the labor costs allocable to onsite preparation, assembly, or original installation of property qualify for the credit. Refer to each item below for total credit limitations, if any.

o Qualifying solar water heating property – This qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purpose is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed. The credit is 30% of the cost with no cap.

o Qualified solar electric property – The property must use solar energy to generate electricity for use in a dwelling unit used as a main or second residence by the taxpayer. The credit is 30% with no cap.

o Qualified fuel-cell property – This is a fuel-cell power plant installed in the taxpayer’s principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30%, and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel-cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel-cell property’s capacity to produce electricity. If two or more individuals jointly occupy a residence, the maximum amount of expenditures that can be taken into account between them (not each) is $1,667 for each 0.5 kilowatt of capacity.

o Qualified small wind energy property – This is property that uses a wind turbine to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer. The credit is 30% with no cap.

o Qualified geothermal heat pump property - Any equipment that uses the ground or ground water as a thermal energy source to heat the dwelling unit used as a main or second residence by the taxpayer or as a thermal energy sink to cool the dwelling unit, and meets the Energy Star program requirements in effect when the expenditure is made. The credit is 30% with no cap.

The REEP credit is a nonrefundable personal credit which can only be used to bring your tax (including the alternative minimum tax) down to zero, and any excess is not refundable. However, the excess can be carried forward to the next tax year and added to the credit allowable for that year.

A taxpayer may rely on manufacturers’ written certifications that the property qualifies for the REEP credit. While the certification does not have to be attached to the tax return, it must be kept as part of the taxpayer’s tax records. The IRS has set out specific information that the manufacturers must include in the certifications.
In addition to these federal credits, some states also have solar or other alternative energy programs that provide credits, grants or rebates which may make these home energy-saving improvements even more affordable.

These credits can be complicated but can provide you with substantial tax benefits, not to mention reduce your energy costs. If you are contemplating one or more of these expenditures, gather the information related to the particular home energy modification you have in mind and then call this office for a consultation appointment. Everyone’s tax situation is different and you may wish to determine just how these tax credits will impact your particular tax circumstances before committing to the expenditure.

---