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Tax Breaks For Energy-Saving Home Improvements

As posted on July 13, 2011 on smartmoney.com

By Bill Bischoff

Uncle Sam still offers two different tax credits for energy-saving home improvements, but some of the rules have changed since last year in a less-generous way. Here's what you need to know.

Modest Credit for Garden Variety Energy-Saving Improvements

The first credit is 10% for certain qualified home improvement expenditures and 100% for certain other qualified expenditures, subject to an overall $500 credit cap. You must reduce the cap by credits claimed in earlier years. While the $500 cap is quite modest, the credit covers a broad range of energy-saving expenditures for your principal U.S. residence (vacation homes and foreign residences are off limits), and there are no income limits -- even billionaires are eligible.

Last year's version of this credit was much more helpful. It equaled 30% of qualified expenditures with a $1,500 cap. The current stingier version will expire at yearend unless Congress extends the deal, which is doubtful.

Credit for Improvements

For the following home improvements, the maximum credit equals 10% of qualified 2011 expenditures (excluding costs for site preparation, assembly and installation).

* Exterior windows including skylights and storm windows, subject to a $200 credit cap

* Exterior doors including storm doors

* Insulation

* Metal and asphalt roofs with heat-reduction components

Credit for Equipment

For the following equipment, the maximum credit equals 100% of qualified 2011 expenditures (including costs for site preparation, assembly and installation), subject to the applicable cap.

* High-efficiency central air conditioners; electric heat pumps and electric heat pump water heaters; water heaters that run on natural gas, propane, or oil; and biomass fuel stoves used for heating or hot water. The cap for all this stuff is $300.

* Furnaces and hot water boilers that run on natural gas, propane, or oil -- subject to a cap of $150

* Advanced main air circulating fans used in natural gas, propane, and oil furnaces -- subject to a cap of $50

Make Sure to Buy Certified Equipment

You must obtain a manufacturer's certification that the product qualifies for the credit. The certification may be on the product packaging, or you may be able to print it out from the manufacturer's website. In any case, keep the certification with your tax records. You won't need to attach the certification to your Form 1040, but you will need to include Form 5695 (Residential Energy Credits) with your return.

Generous Credit for More Exotic (and Expensive) Energy-Saving Improvements

There's another completely separate credit for 30% of expenditures to buy and install more exotic, and expensive, energy-saving equipment for your home. Big expenditures can generate big credits. There are no income limits, and this credit will be available through 2016, so there's no big hurry to cash in on this one. If your 2011 credit is so large that you cannot use it all on this year's return, you can carry the excess credit forward to 2012 and beyond.

Qualified Expenditures

The credit equals 30% of qualified expenditures (including osts for site preparation, assembly, installation, piping and wiring) for the following gear.

* Solar water heating equipment for your U.S. residence (including a vacation home)

* Solar electricity generating equipment for your U.S. residence (including a vacation home)

* Wind energy equipment for your U.S. residence (including a vacation home)

* Geothermal heat pump equipment for your U.S. residence (including a vacation home)

* Fuel cell electricity generating equipment for your U.S. principal residence. Vacation homes don't count here. The maximum annual credit is limited to $1,000 for each kilowatt hour of fuel cell capacity.

Unfortunately, you cannot claim the credit for equipment used to heat a swimming pool or hot tub (that would be too good to be true). Special rules apply to expenditures for residential co-ops and condominium buildings.

Make Sure to Buy Certified Gear

Once again, you must obtain a manufacturer's certification that equipment qualifies for this credit. Keep it with your tax records (but don't attach it to your return). Be sure to also keep proof of how much you spend, including any extra amounts for site preparation, assembly and installation. To claim the credit, file Form 5695 with your Form 1040.

Additional Goodies May Be Available

You also might be eligible for state and local tax benefits, subsidized financing deals and utility company rebates. Contact your utility company and do some homework on the internet to find these incentives. Hopefully the energy savings, together with the tax breaks and any other goodies, will justify the cost.