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Facts on the Energy-Efficiency Tax Credit

Home owners can access two tax credits for adding energy efficiency improvements to their homes.

The Wind, Solar, Geothermal and Fuel Cell Tax Credit (Tax Code Section 25D):
Tax credits are available at 30 percent of the cost, with no cap through 2016, for existing homes and new construction, for:
  • Geothermal Heat Pumps
  • Solar Panels
  • Solar Water Heaters
  • Small Wind Energy Systems
  • Fuel Cells (on this item the credit may not exceed $500 for each 0.5 kilowatt capacity; other limits apply in the case of joint occupancy)

The energy-efficiency home products must be "placed in service" between Jan. 1, 2011 and Dec. 31, 2011. The credits are only valid for improvements made to the taxpayer's principal residence, except for qualified geothermal, solar, wind property, which can be installed on any home used as a residence by the taxpayer.

Qualified Energy Efficiency Improvements (Tax Code Section 25C):
provides a 10-percent credit for the purchase of qualified energy efficiency improvements to existing homes. The energy-efficiency home products must be "placed in service" between Jan. 1, 2011 and Dec. 31, 2011.

Under section 25C, the maximum credit for a taxpayer for all taxable years is $500, and no more than $200 of such credit may be attributable to expenditures on windows.

This rule means that taxpayers who have claimed $500 or more of this tax credit in prior years, particularly 2009 and 2010, can no longer participate in the program.

Installation costs only count for tax credit for the installation of non-building envelope qualified property.

The credit is nonrefundable and does not have to be repaid to the federal government.

Special proration rules apply in the case of jointly owned property, condominiums, and tenant-stockholders in cooperative housing corporations. If less than 80 percent of the property is used for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes is taken into account. For purposes of determining the amount of expenditures made by any individual with respect to any dwelling unit, expenditures which are made from subsidized energy financing are not taken into account. The term ''subsidized energy financing'' means financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

A qualified energy efficiency improvement is any energy efficiency building envelope component:
  1. meets or exceeds the prescriptive criteria for such a component established by the 2009 International Energy Conservation Code as such Code (including supplements) (or, in the case of windows, skylights and doors, and metal roofs with appropriate pigmented coatings or asphalt roofs with appropriate cooling granules, meets the Energy Star program requirements);
  2. is installed in or on a dwelling located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence;
  3. the original use of which commences with the taxpayer; and
  4. that reasonably can be expected to remain in use for at least five years.

Building envelope components (Installation costs not included):
  • Insulation material or systems (specifically and primarily designed to reduce the heat loss or gain for a dwelling and which meet the prescriptive criteria for such material or system established by the 2009 International Energy Conservation Code)
  • Exterior window, skylight, door, storm window or storm door
  • Metal or asphalt roofs (with appropriate pigmented coatings or cooling granules that are specifically and primarily designed to reduce the heat gain for a dwelling).

Additionally, section 25C provides specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the taxable year. The allowable credit for the purchase of certain property is
  • $50 for each advanced main air circulating fan,
  • $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and
  • $300 for each item of energy-efficient building property.

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil furnace and which has an annual electricity use of no more than two percent of the total annual energy use of the furnace (as determined in the standard Department of Energy test procedures).

A qualified natural gas, propane, or oil furnace or hot water boiler is a natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization efficiency rate of at least 95.

Energy-efficient building property (Installation costs may be included):
  • an electric heat pump water heater which yields an energy factor of at least 2.0 in the standard Department of Energy test procedure,
  • an electric heat pump which achieves the highest efficiency tier established by the Consortium for Energy Efficiency, as in effect on January 1, 2009,
  • a central air conditioner which achieves the highest efficiency tier established by the Consortium for Energy Efficiency, as in effect on Jan. 1, 2009,
  • a natural gas, propane, or oil water heater which has an energy factor of at least 0.82 or thermal efficiency of at least 90 percent, and
  • biomass fuel property, which is a stove that burns biomass fuel to heat a dwelling unit located in the United States and used as a principal residence by the taxpayer, or to heat water for such dwelling unit, and that has a thermal efficiency rating of at least 75 percent.

Biomass fuel is any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers.

How to Claim the Tax Credits
Home owners can claim the 25C and 25D credits on Form 5695 when they file their income tax returns. Check with your tax professional to ensure correct application of the energy-efficiency tax credit. Retain all receipts as well as records that include:
  • Name and address of manufacturer
  • Identification of the class of eligible building envelope component
  • Make, model number and any other property identifiers
  • A statement that the component is eligible for the credit (may include U factor, class of window or door, etc.)

This information comes from ENERGY STAR, for more information visit the ENERGY STAR website at www.energystar.gov/taxcredits.

To learn more about remodeling visit NAHB Remodelers at www.nahb.org/remodel.

NAHB is providing this information for general guidance only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question. None of this tax information is intended to be used nor can it be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
 
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