For those living in the United States, April 15th marks one of those inevitable realities in life: it’s tax time. The close of the 2010 tax year brings an end to some great incentives for energy efficiency. But if you missed out in 2010, all is not lost. Here are some tips for reducing your taxes in 2011 with energy-saving upgrades to your home.
First, the bad news...
Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law extended the tax credits for energy efficiency into 2011, but at significantly lower levels. The guidelines essentially revert back to what you could get in 2006 and 2007. What’s worse, there’s now a $500 lifetime limit on the tax credit for many eligible home improvements. If you’ve already received energy credits of $500 or more in previous years, you’ve reached your lifetime limit and are no longer eligible. Compare that with the credits for the same home improvements in 2009-10 – 30% of your combined expenses up to $5,000, for a maximum annual credit of $1,500, with no lifetime limit – and it’s easy to be disappointed.
But now the good news…
A tax credit is much better than a deduction.
It’s important to understand the significant advantage of a tax credit over a tax deduction. A deduction only removes a percentage of the tax you owe. Income limits and other tax rules often minimize or eliminate the benefit of many deductions. But a tax credit reduces your overall tax liability, dollar-for-dollar. It directly reduces the total amount you owe.
The $500 limit covers $5,000 worth of improvements.
If you’re already planning to improve your home’s energy efficiency in the next five years, you can get 10% credit for your combined eligible expenses of up to $5,000. The following items qualify for tax credits (excluding installation), with the noted maximum caps:
• Insulation, roofs, and doors, up to $500
• Energy Star-qualified windows, up to $200
• Qualified furnaces and boilers, up to $150
• Advanced main air circulating fan, up to $50
• Air conditioners, air source heat pumps, water heaters, and biomass stoves, up to $300
Big credits are available for big ticket items.
Most of the more expensive energy investments are separate and exempt from the $500 lifetime limit. This includes geothermal heat pumps, solar water heaters, solar panels, fuel cells, and wind generators. These items are eligible for a 30% credit with no upper limit, through 2016.
Big ticket credits carry over until 2016.
You can carry unused credits for eligible big ticket purchases into future tax years, until at least 2016. Energy tax credits are considered “non-refundable,” meaning you can’t get money back for anything more than your tax liability for that year. You can’t cash in leftover credits for a tax refund. But an investment now might help you in the coming years.
There are many state, city, and utility incentive programs available.
Many local programs cover items commonly excluded at the federal level, such as energy efficient appliances. This may help you lower the cost of your home improvement or lower your state tax liability. To see what’s available in your area, check the extensive Database of State Incentives for Renewables & Efficiency (DSIRE).
A few more notes:
• Many common energy-saving home improvements, such as ceiling fans, energy efficient appliances, compact fluorescent and LED light bulbs, rain collection barrels or water saving toilets do not, nor did they ever, qualify for federal tax credits. Check the DSIRE site to see what's available at the state, local and utility level.
• Improvements must be made to your principal residence. Investment properties and second homes have restrictions or simply are not eligible.
• Improvements must be placed in service (not simply purchased) on or before the end of 2016.
Energized is an ongoing series following my education about living a more sustainable life.
As Vice President of frog’s Design Realization group, Collin works closely with our design and engineering teams to bring innovative ideas to market. With over 20 years of experience in both creative and engineering management, Collin brings focus and multi-disciplinary expertise to this critical phase of the delivery process. In 1996, Collin co-founded frog’s digital media group and has worked extensively with frog clientele in the USA, Europe, and India.