New Tax Breaks for Energy Efficient Home Improvements

How to Make Your Home More Energy Efficient and Get some Valuable Tax Breaks

By Mark J. Donovan

By making your home more energy efficient you can take advantage of a number of new tax breaks that will mitigate some of the costs of your home improvements.
In 2005 an Energy Tax Incentives Act went into effect that provides tax breaks for those individuals who invest in their homes to make them more energy efficient. The law provides a tax credit of up to $500 for energy saving home improvements made on a residential home after 12/31/05 and before 01/01/08. In addition, it stipulates that up to $200 of the tax credit can be applied directly to the installation of energy efficient windows.A tax credit is different than a tax deduction. Whereas a tax deduction allows you to lower your adjusted gross income, a tax credit allows you to deduct your total taxes owed by the tax credit amount.

Consequently a tax credit represents a significant savings in taxes owed to the federal government. For example, if your annual federal tax payment was initially calculated to be $2,000, with the $500 tax credit applied the federal tax payment would be reduced to $1,500, a 25% savings.

Summarized below are the highlights of the new tax breaks for energy efficient homes.

Again, there is a lifetime tax credit of up to $500.00, $200 of which can be applied to the cost of installing new and energy efficient windows.

Up to 10% of the cost of building envelope materials can be applied to the tax credit. Building envelope materials include items such as:

Insulating material
Metal roofing material that includes a pigmented coating material to reduce heat gain into the home.
Exterior windows
Exterior doors

The material has to be new and have a lifetime of at least 5 years to qualify for the home improvement tax credit. In addition, it must provide value in terms of making the home more energy efficient.

To qualify for the tax credit the home must be your primary residence that you own and be located in the United States. Consequently the new tax breaks for energy efficient home improvements does not apply to vacation homes, second homes, or rental property.

New tax breaks for energy efficient home remodeling projects.

Relative to specific energy efficient property expenditures the following max limits can be applied for in the tax break.

Up to $150 for the installation of a qualified propane, natural gas oil furnace or hot water boiler
Up to $50 for a main circulating fan
Up to $300 for any item that is deemed an energy efficient building property, which includes items such as geothermal heat pumps, central air conditioners, heat water pumps and water heaters.

In addition to the material costs, installation costs can also be applied to the tax credit. To make sure you comply with the law make sure you have written contractor quotes or receipts for the materials that guarantees the new building materials installed meet the energy efficiency standards of the law.

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