Don't Overlook Tax Savings When Preparing for Winter

By Marcia Richards Suelzer, Toolkit Staff Writer

Going green may enable you to save some green by reducing your income tax bill for 2011. There are two tax credits available to help offset the cost of making your home more energy-efficient: the Residential Energy Efficient Property tax credit and a limited Non-Business Energy Property tax credit.

Think Ahead. Most states also offer some type of tax credit, deduction or rebate for improving your home's energy efficiency. Make sure that you check your state's law and plan your purchases to maximize your savings.

Residential Energy Efficient Property Tax Credit

The Residential Energy Efficient Property (REEP) tax credit allows you to claim a credit equal to 30 percent of the cost of installing the following types of residential alternative energy equipment:

• qualified solar electric,
• solar water heating property,
• small wind energy property, and
• geothermal heat pump property.

Beginning in 2011, the amount of the credit is unlimited for these types of property. The cost of the property includes any labor costs properly allocable to the on-site preparation, assembly, or original installation of the residential energy-efficient property. It also includes any costs incurred for piping or wiring to interconnect such property to the home.

Example. In October, 2011, Michael has a solar water heater installed in his home. The water heater cost $2,000 and the labor and wiring cost $1,000, for a total cost of $3,000. He can claim a $900 tax credit (30 percent of $3,000) on his 2011 income tax return.

You can claim the credit for your principal residence and your second home (but not a rental home.) In addition, improvements to both newly constructed and existing property can qualify.

Fuel Cell Property. The REEP credit is also available for qualified fuel cell property, but the amount and terms of the credit are more limited. The credit amount for costs paid for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property. In addition, you can only claim a credit for fuel cell property installed in your main residence.

If you are considering installing alternative-energy property, you must make sure that it qualifies for the credit. Manufacturers must certify that their products meet new standards and they must provide you with a written statement to they effect. This statement can be included in the product packaging or on the manufacturer's website. You need to make sure to keep a copy of the manufacturer's certification statement, as well as your receipts for the equipment and labor charges.

Warning. Don't simply look for the ENERGY STAR label. Not all ENERGY STAR products qualify for a tax credit: You need to make sure you have a copy of the manufacturer's certification of eligibility for the tax credit. For detailed information about qualifying improvements, visit the U.S. Department of Energy's EnergyStar website and the EnergyStar Frequently Asked Questions website.

Non-Business Energy Property Credit

The Non-Business Energy Property (NBEP) credit was slated to expire at the end of 2010. However, it was extended--in an extremely limited form--through the end of 2011. Unlike the Residential Energy Efficient Property tax credit, the NBEP can only be claimed for improvements made to your principal residence and can not be claimed for new construction. The types of expenditures that are eligible for the NBEP credit are far broader than those that qualify for the REEP. The NBEP credit can offset the cost of adding insulation, installing energy-efficient exterior doors and windows, installing energy-efficient heating and air-conditioning and installing certain metal or asphalt roofs.

For 2011, the maximum NBEP credit allowed is $500. Moreover, the maximum amount is reduced (but not below zero) by the total of your NBEP credits for 2006 through 2010. The credit allowed for windows for 2011 is limited to $200, reduced (but not below zero) by the total of your credits for windows from 2006 through 2010.

Tip. If you have not claimed the NBEP in any preceding years, or if what you have claimed will not reduce this year's expenses to zero, then you may want to consider making improvements and claiming the credit. While $500 seems a small amount, it is important to remember that a tax credit reduces your tax liability dollar-for-dollar. (For this reason, a tax credit is nearly always preferable to a tax deduction because it will save you more money on your tax bill.)

Claiming the Credit

Form 5695, Residential Energy Credits, is used to claim the credit. Use Part I of Form 5695 to claim the Nonbusiness Energy Property Credit and Part II of Form 5695 to claim the Residential Energy Efficient Property Credit.

Act Now. Even though your tax return is not due for another six months, you should take time to review the form before you make any purchases because it provides detailed information on what types of property qualify. Although only the 2010 version is currently available, the definition of qualifying property will be the same.