New Tax Breaks for Energy Efficient Home Improvements

If you would like to make your existing home more energy efficient and get some help paying for the improvements, you need to know about the Energy Tax Incentives Act of 2005. The new law provides a $500 lifetime credit against your federal income tax for the cost of certain energy-saving home improvements that you make to your home after December 31, 2005 and before January 1, 2008. Up to $200 of the tax credit may be applied to windows.

As you may know, a tax credit is far more favorable than a deduction of the same amount. Deductions only reduce the amount of income that is subject to tax. A tax credit, on the other hand, is a dollar for dollar reduction of the tax due when you file your income tax return. So, if you are in the 28% income tax bracket, the new $500 credit is equivalent to a tax deduction of nearly $1800!

Here are highlights of the new provisions:

There is an overall lifetime cap on the credit of $500, and a maximum of $200 of the credit may be applied to qualified window expenditures. Subject to those limitations, you may receive a credit for the sum of the following:

Building Envelope Components. Ten (10%) percent of your expenditures for so called "building envelope components" will qualify for the tax credit. Building envelope components include the following:

• any insulation material or system which is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit,
• exterior windows (including skylights),
• exterior doors, and
• any metal roof installed on a dwelling unit, but only if such roof has appropriate pigmented coatings which are specifically and primarily designed to reduce the heat gain of such dwelling unit.

To qualify for the credit, the building envelope components must be installed in or on a dwelling unit (including a manufactured home) located in the United States that is owned by you and used by you as your principal residence. Installation of envelope components in a second or vacation home or rental property therefore will not qualify for the new tax break.

Only new components are eligible for the credit and the components must reasonably be expected to remain in use for at least 5 years.

Energy efficient property expenditures. Amounts paid for "residential energy property expenditures" will also qualify for the credit up to the following specific limits:

• Up to $50 for any advanced main air circulating fan;
• Up to $150 for any qualified natural gas, propane or oil furnace or hot water boiler;
• Up to $300 for any item of "energy-efficient building property." This includes certain qualifying electrical heat water pumps, electric heat pumps, geothermal heat pumps, central air conditioners and natural gas, propane or oil water heaters.

Expenditures for labor costs for onsite preparation, assembly or original installation may be included. Improvements must be installed in or in connection with a dwelling unit located in the United States that is owned by you and used by you as your principal residence.

There are energy efficiency standards described in the new law that your home improvements must meet, so some investigation on your part will be necessary to be sure that the improvements will qualify for the credit. For this reason, if you hire a third party to do the work, your written agreement with the contractor should include the contractor's guaranty that the installed property will meet the energy efficiency standards of the new law.

There is one potential trade-off, if you use the credit. Many improvements to your home will increase your "tax basis" in the property, and this increased tax basis may, in turn, reduce the amount of capital gain that is realized if you sell your home at a profit. The increase in tax basis that would otherwise result from energy efficient improvements that qualify for the credit will be reduced by the amount of the allowed credit. Since the tax credit decreases your tax basis, you are likely to have more capital gain at the time of sale. This will not affect you if all of the capital gain realized at the time of sale is protected by the $250,000 exclusion ($500,000 for married couples) for gains realized on the sale of your principal residence. But even if there is an increase in the taxable capital gain realized when you sell your home, it will almost certainly be outweighed by the advantage of using the new income tax credit currently.

Like so much of the Internal Revenue Code, the new provisions encouraging energy efficient home improvements seem unnecessarily complicated, but we have to consider the source - Congress! However, a bit of patience and careful planning will bring you some very real tax savings and help the environment to boot!

John Pollock is an attorney practising in Detroit, Michigan and the webmaster of http://www.forms-free-4-all.com

---

The Dangers of Pesticides and the EPAs Harrowing Plan to Test Them on Kids

Pesticides are a ubiquitous toxin in our environment. We spray... Read More

Ten Things You May Not Know About Selecting Hardwood Flooring

1) Red Oak is not the only choiceIf you want... Read More

Sofa slipcovers - Give your home an instant makeover!

Sofa slipcovers are designed to be easy to fit over... Read More

Planning Permission Tips UK - Loft Conversions in UK Properties - Do They Add Value?

We get a great many requests to view the potential... Read More

10 Things To Consider Before Planning And Installing A New Bathroom

Whether you want to install a new bathroom or make... Read More

How to Get the Most Out of Your Home Theater ? Without Spending a Fortune

So you've scraped and saved, now you've finally gotten together... Read More

Prefabricated Home Packages

This is by no means an exhaustive list of what's... Read More

Fire Hazard Alert - Is Your Dryer Ready to Ignite

In recent years there has been many stories about dryers... Read More

Buying Replacement Windows

While most buyers of double glazing are looking for replacement... Read More

How To Find Cat Mailboxes

You can add a personal touch to your home or... Read More

How To Choose The Canvas For Your Awning

The main factor for the canvas for your awning, it's... Read More

Window Dressing from the Outside Looking In

Window coverings are important to the overall look and feel... Read More

Choosing Your Builder: Cheapest Quote Wins?

You have your 3 quotes from each potential builder so... Read More

Help With Buying A New Ceiling Fan

When you are choosing a new ceiling fan there are... Read More

The Right Bathroom Light Fixture Will Brighten Up Your Bathroom

A bathroom light fixture may be just what the doctor... Read More

Keeping Stone Floors in Tip Top Condition

I had a customer call me to make a complaint... Read More

Roller Blinds

What is behind the popularity of roller blinds. Is it... Read More

Basement Waterproofing Advice

Basements need to be waterproofed for many reasons. Cracks in... Read More

Bathroom Wall Cabinets ? Create Extra Space with a Touch of Style!

Is your bathroom looking cluttered? How about fitting new bathroom... Read More

Make Your Hardwood Floors Shine

You have just installed hardwood flooring in your home. Now... Read More

What is Wire EDM?

What exactly is wire electrical discharge machining, also referred to... Read More

Summer Is Here! Consider Tackling Key Home Improvement Projects While The Weather Is Good!

Summer time means barbeques, baseball, camping, and yes, Home Improvement... Read More

Add Value To Your Home With A Home Improvement Loan

Buying a home is a big and important investment for... Read More

Worktops and Countertops for Kitchens - Buyers Guide to Materials

Worktops and Countertops for Kitchens - Buyers Guide to MaterialsThe... Read More

What You Should Know About Steam Showers

"Steam" and "Steam Bath" Health Benefits:"Steam" and "Steam baths" in... Read More