By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
With energy costs on the rise, it makes perfect sense for homeowners to do all they can to minimize their utility costs. For some, though, long-term energy savings are not enough to justify the expense and hassle of upgrading a home. Now, however, there are substantial financial incentives for making energy-efficient home improvements.
In what may be one of the best kept secrets of last year, the Energy Tax Incentives Act of 2005 provides two great new energy tax credits for homeowners in 2006 and 2007: the Credit for Nonbusiness Energy Property (CNEP) and the Residential Energy Efficient Property (REEP) credit. As you will soon see, homeowners have not had such a favorable tax break since the creation of the home mortgage interest deduction.
Credit for Nonbusiness Energy Property
The CNEP provides a credit for individuals who make energy-efficient improvements to their existing principal homes. Improvements to a vacation home or other second residence do not qualify for this credit.
The credit is applied against a taxpayer's regular income tax, nonrefundable, and is subject to a lifetime limitation of $500. No more than $200 of such credit can be attributable to the purchase of energy-efficient windows. The credit for a tax year is equal to the sum of:
- 10 percent of the amount paid or incurred by the taxpayer for "qualified energy-efficiency improvements" installed during the tax year; and
- the amount of the "residential energy property expenditures" paid or incurred by the taxpayer during such tax year.
Qualified energy-efficiency improvements are any energy-efficient building envelope components that satisfy the criteria of the 2000 International Energy Conservation Code (including supplements) that is in effect as of the date of enactment of the Energy Act and are reasonably expected to remain in use for at least five years. Generally, these are cosmetic or exterior improvements done to improve the conservation of generated energy within the home. Qualifying building component improvements include the following items:
- new insulation materials or systems designed to reduce heat loss or gain
- replacement windows, skylights, and exterior doors
- new metal roofs specifically treated with heat-reducing pigments or coatings satisfying the Energy Star program requirements
In the case of residential energy property expenditures, these are infrastructure improvements designed to consume less energy at the point of usage. For these items, the credit may not exceed:
- $50 for any advanced main air circulating fan;
- $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and
- $300 for any item of energy-efficient building property.
Qualified expenditures include labor costs properly allocable to the onsite preparation, assembly, or original installation of the property. So, you don’t have to be a do-it-yourselfer to take advantage of this credit. However, saving on labor costs by doing upgrades yourself can help stretch your available credit (on top of the labor costs saved which can easily double a project’s cost).
Residential Energy Efficient Property Credit
The REEP credit applies to expenditures for qualified property that will produce energy for home use and is applicable against the taxpayer's regular tax liability that is first reduced by other nonrefundable personal credits. The credit is nonrefundable and any unused credit may be carried forward to the next succeeding tax year and added to the REEP credit for such succeeding tax year. The credit for a tax year is equal to the sum of:
- 30 percent of qualified photovoltaic property (i.e., solar panel) expenditures made by the taxpayer during such tax year;
- 30 percent of qualified solar water heating property expenditures made by the taxpayer during such tax year (other than for heating swimming pools and hot tubs); and
- 30 percent of qualified fuel cell property expenditures made by the taxpayer during such tax year.
Expenditures for labor costs allocated to onsite preparation, assembly, or original installation of property eligible for the credit are qualified expenditures in addition to the property expenditures. The maximum REEP allowed is limited to $2,000 for photovoltaic property expenditures; $2,000 for solar water heating property expenditures; and $500 for each half kilowatt of capacity of qualified fuel cells purchased.
A second residence or vacation home will qualify for the credit with respect to expenditures for qualified solar water heating property and qualified photovoltaic property only. Consequently, a taxpayer could use the credit in each of two years on different properties, to the extent that qualifying purchases do not exceed the limitation for each type of expenditure. If installations of qualifying property are planned for two homes, completion dates should be scheduled one each in 2006 and 2007 to take advantage of the maximum amount of credit allowable for each project. Also, as an expenditure is deemed to have been made when the installation of the item is completed or at the time of first use of the property by the taxpayer with respect to expenditures in connection with the construction or reconstruction of a building, installations started in 2005 should not be finished if possible until 2006 in order to take advantage of the credit for qualifying expenditures already made.
Additionally, those who use part of their homes for business purposes don’t have to fear missing out on the REEP credit. For mixed use property, the REEP credit allows a full credit to homeowners who are using their residences at least 80 percent for nonbusiness purposes. This allows taxpayers who rent out their vacation homes, or who have offices in their homes to still enjoy a full credit if the business use is 20 percent or less. If the homeowner does not meet the 80-percent test, the credit must be prorated to the actual non-business percentage.
Planning Opportunity
More than likely, taxpayers will soon see advertising by many home-improvement businesses regarding the availability of these credits. However, there is much confusion over what property qualifies for the credits. Generally, this confusion should be resolved through manufacturers' product certification and the release of future IRS regulations. However, many other questions will arise, as well as many traps for the unwary.
In the meantime, the main thing to keep in mind is that these new tax breaks are designed to spur taxpayers toward energy conservation. To take advantage of the tax breaks and achieve long-term energy savings, taxpayers should start prioritizing their home improvement projects now. Once a list of likely projects with related costs is made, consulting a tax advisor will become essential to help sort through all of the new rules and to structure the purchase for maximum tax benefit.
Just think. The money pit you call a home may actually spit some money back at you for a change!
- Related items:
- Congress Returns to Unfinished Work
- IRS Programs Come Under Fire
- New Tax Year Means Many Tax Changes to Consider
- Permanent AMT Fix Poses Difficult Choices
- Congress Ends 2005 Session; Tax Reconciliation Conference Ahead in 2006
- Congress Finalizes Katrina Tax Relief, Turns to Reconstruction Funding
- Congress Wraps Up More Economic Gifts: New Tax Relief
- Tax Reform Panel Releases Final Report
- IRS Still Trying to Deliver 2005 Refunds
- AMT Negates Tax Relief for High Earners
- Tax Rate Projections for 2006
- IRS Temporarily Raises Standard Mileage Rate
- Sales Tax Holidays Offer Consumer Savings and Business Opportunities
- New Reforms of Flexible Spending Accounts Will Benefit Employees
- National Tax Reform Panel Listens to Options, Obstacles
- CEA Report Examines Tax Reform Options, Predicts Sustained U.S. Economic Growth
- Over $2 Billion In Unclaimed Refunds From 2001 Faces Looming Deadline
Added to the news on February 7, 2006.
|
