TAX NEWS - June 2010

Energy efficiency tax credit

Homeowners have until the end of the year to make improvements that qualify for a federal energy-efficiency tax credit. Such improvements include insulation upgrades as well as heating and air-conditioning equipment.

This isn't to say homeowners' incentives for energy efficiency will go away for good after this year. Some efforts are underway in Washington to extend the credit. A separate bill slowly working through Congress would provide similar and possibly bigger breaks.

Moreover, homeowners may be eligible for numerous local incentives--sometimes through utility companies--and State-run programs for Energy Star appliance rebates. Such rebates are funded by federal dollars but administered locally.

Here's what homeowners need to know about finding some financial help for energy-efficiency upgrades in their homes:


Federal Tax Credits

Eligible upgrades for a federal tax credit include insulation; windows and doors; roofs; heating; ventilating and air-conditioning systems; water heaters; and biomass stoves. The credit is worth 30% of costs, and up to a maximum of $1,500 for all improvements. Installation costs for windows and doors, roofs and insulation aren't eligible.

To qualify, materials have to meet certain energy-efficiency standards. The homeowner must be making improvements to an existing principal residence. Rental homes don't qualify.

Separately, a tax credit is also available for more advanced energy improvements, including solar panels and wind turbines. This credit is worth 30% of your costs -- with no cap -- and doesn't expire until the end of 2016.

These federal tax credits are nonrefundable. They reduce your tax bill dollar for dollar, though you won't receive money back if you don't owe any federal income tax. For some of the more advanced energy improvements, the credit can be carried forward to future years. For more information, go to EnergyStar.gov and search for "tax credits."

It's important to do improvements in the proper order to get the most for your money, said Ronnie Kweller, spokeswoman for the Alliance to Save Energy, an advocate for energy-efficiency policies.

"The first thing we recommend: Seal up and properly insulate the house. No matter how efficient your equipment is, if you're sending warmed or cooled air out the window, or cracks around the window, you're not going to be ahead," Kweller said.

Addressing insulation problems first could save you money on your next project, said Matt Golden, president and founder of Recurve, a San Francisco-based home-performance company. For example, sometimes a smaller furnace is all you need once the building's envelope is sealed properly.


Look Locally

Despite the emphasis on federal tax credits, many incentives are available at the local level, said Gary Nieman, vice president of government-policy initiatives for Owens Corning, a building-materials producer. Utility companies will sometimes offer financial assistance for home-energy audits, for example, and many state and local communities offer help for energy-efficiency upgrades.

To get a handle on what help is available near you, Golden recommends visiting the Database of State Incentives for Renewables and Efficiency at DSIREusa.org.

For instance, in Illinois, if Nicor Inc. is your provider, energy-efficient heating products purchased and installed before May 31, 2011 are eligible for rebates. In South Carolina, Duke Energy Carolinas electric residential-retail customers can qualify for rebates on certain heat pumps and air conditioners.

States also are handling disbursement of the $300 million stimulus funds for energy-efficient appliances. The program has been popular--in some areas funding has already run out.


More To Come

Energy-efficiency advocates are lobbying for an extension of the current federal tax credit set to expire at the end of the year. Pending legislation on the proposed "Home Star" program would provide even more help for homeowners and would likely create jobs.

Two types of rebates would be available under that program. Silver Star rebates would offer a 50% discount on specific improvements including insulation, duct sealing, windows and doors, and water heaters. Such rebates could add up to a combined $3,000 per home. Gold Star rebates are for more comprehensive work, and reward homeowners who perform an energy audit and implement a full set of measures to reduce energy. Those homeowners could receive up to $8,000 by achieving a certain level of home efficiency, if the Home Star program is approved.

"Home Star is designed first and foremost as a jobs bill," focused on putting Americans to work by retrofitting existing homes, Recurve's Golden said. Yet Home Star also encourages consumers to think about their home's total performance as opposed to a patchwork of purchases to improve efficiency, he said.

For the foreseeable future, chances are good that the government or utilities will offer something to help consumers shoulder the cost of energy-efficiency home improvements, Nieman said. After all, he said, these subsidies are in municipalities' and utilities' best interest: Conservation reduces the need to build more power plants to keep up with demand.