[August
2005]
As some of
you may already know, President Bush recently signed the new
Energy Act of 2005. We want to inform our clients and
friends about the Act and how it can save you money.
Although this new law carries many new incentives for energy
companies to boost energy production and efficiency, it also
includes new and substantial tax incentives for individuals
to make energy saving (and some energy creating)
improvements to their homes. The incentives come in the form
of tax credits which reduce your federal tax bill on a
dollar-for-dollar basis. What's more, the credits are not
phased out at higher-income levels.
Here's an
overview of the new tax breaks you can look forward to next
year, when the new tax incentives will begin. Keep in mind
that you probably won't have to determine for yourself
whether a home improvement creates or saves enough energy to
qualify for a tax credit under the new law's complex and
technical rules. In all likelihood manufacturers will
certify, in the materials that come with their products,
whether equipment and materials create or save enough energy
to qualify for a tax credit. You will, of course, have to
shop around for the best deal and the best product. You will
also have to determine whether your use of the equipment
qualifies you for tax breaks, and how to make the best use
of them (we'll help you with this, of course).
New
tax credits for solar and fuel-cell equipment. You
will be able to claim a tax credit each year for:
(1) 30% of the
cost of equipment that uses solar energy to generate
electricity (photovoltaic property), up to a $2,000 maximum
tax credit.
(2) 30% of the
cost of solar water heating equipment, up to a $2,000
maximum tax credit.
(3) 30% of the
cost of a fuel cell power plant (new technology that
converts fuel into electricity using electromechanical
methods, and meets other detailed requirements), up to a
$500 maximum tax credit.
“Cost”
includes installation as well as hardware costs. The
equipment in the first two categories may be installed in
your main home or second home (e.g., vacation home); the
equipment in the third category must be installed in your
main home. “Home” includes a co-op or condo as well as a
regular home. All three types of equipment must be installed
in a home located in the U.S., and can't be used to heat a
swimming pool or hot tub. Tax credits for solar and
fuel-cell property will only be available for equipment
placed in service in 2006 or 2007.
Illustration: In 2006, you buy $8,000 of solar
energy equipment and install it in your main home; you buy
another $4,000 of solar water heating equipment and install
it in your vacation home. Your total tax credit for 2006 is
$3,200, consisting of:
... $2,000 for
the solar energy equipment (30% of $8,000 is $2,400, but the
credit limit is $2,000); plus
... $1,200 for
the solar water heating equipment (30% of $4,000).
In 2007, you buy $6,000 of
solar energy equipment for your second home. When you file
your return for the 2007 tax year, you'll be able to claim
another $1,800 tax credit (30% of $6,000).
New
tax credits for energy efficient improvements. You
will be able to claim a tax credit for buying an assortment
of energy saving improvements and installing them in your
main home. The credit depends on the type of improvement
plus there's an overall lifetime dollar limit for all
improvements.
The credit
per improvement is:
-
10% of the
cost of energy efficient building envelope components.
These consist of: insulation materials or systems that
reduce heat loss/gain; exterior windows (including
skylights); exterior doors; and certain metal roofs with
special coatings designed to reduce heat gain. You must
be the first user of the equipment, which must be
expected to last for at least five years.
-
Up to $300
tax credit for the cost of energy-efficient building
property (electric heat pump water heater, electric heat
pump; geothermal heat pump, central air conditioner, and
natural gas, propane, or oil water heater meeting
specific energy efficiency standards).
-
Up to $150
credit for a natural gas, propane, or oil furnace or hot
water boiler.
-
Up to $50
credit for an advanced main air circulating fan.
Your overall
lifetime tax credit for all of the above improvements is
$500, but only $200 of this credit amount may be for buying
and installing energy-saving windows. Tax credits for energy
efficient improvements will only be available for equipment
placed in service in 2006 or 2007.
Illustration: In 2006, you spend $3,000 of
certified energy efficient insulation for your main home,
and install certified energy efficient windows costing
$2,000. In 2007, you spend $2,000 on a new certified energy
efficient natural gas boiler for your main home. For 2006,
you may claim a $500 tax credit (10% of the $3,000
insulation, plus 10% of the $2,000 windows). You've attained
your lifetime maximum, so there's no tax credit for the
boiler you install in 2007.
As you can
see, the Energy Act has created substantial tax incentives
for homeowners to upgrade and add equipment that generates
electricity or uses less electricity or other energy. If you
have any questions, please feel free to call Vincent Ruocco,
LLC, CPA at (203) 932-2931. Vincent may also be reached by
email at vruocco@artcpas.com
