TAX CREDITS FOR HIGH EFFICIENCY EQUIPMENT


The Energy Policy Act of 2005 provides tax credits for certain energy-efficient investments you make in your home between January 1, 2006 and December 31, 2007. To qualify, the house must be your main home, in the U.S., you must be living in it when the improvements are made, and the energy-efficiency improvements must meet prescribed requirements.

The maximum credit is $500 per home, including the costs of insulation, windows, air and duct sealing. This is a cumulative credit for all improvement/replacement categories for both years. Improvements each qualifying for less than $500 can be bundled together to equal this cap over the two-year period.

The categories and tax credits are:

• Central air conditioners (split systems and package units): $300
• Heat pumps (air-to-air and ground source): $300
• Furnaces (natural gas, propane, or oil; advanced main indoor circulating fan): $150
• Variable-speed furnace fans: $50
• Duct sealing: 10% of material price
• Other building improvements (windows, doors, insulation, hot water heaters): 10% of material price

FAQs
Deductions, credits, and rebates – what’s the difference?
Tax deductions reduce your overall taxable income; the value of the deduction depends on your tax bracket. For example, if you are eligible for a $1,000 deduction and are in the 20% tax bracket, the deduction will reduce your taxes by $200. Tax credits, such as the ones provided for in the 2005 Energy Policy Act, reduce the amount of tax you owe dollar for dollar. Rebates are simplified incentives – instead of reducing the amount of tax you owe; rebates reduce the cost of a purchase. Think of the rebate you may get on a cell phone or small appliance. Rebates on energy-efficiency investments are offered by some utilities and states (see http://www.energytaxincentives.org/tiap-state-utility-incentives.html).

How do credits or rebates from states or utilities affect the federal tax incentives?
Fixed federal credits (e.g., $300 for an eligible air conditioner) are not affected by state credits or utility rebates. For federal credits that depend on cost (e.g., upgrades to existing homes and solar energy systems), the federal credit will generally be calculated after deducting the value of utility or state incentives. For example, if upgraded insulation costs $1500 and is eligible for a $300 state credit, the federal credit is calculated on the cost after subtracting the state credit. In this example, the federal credit will be $120, which is 10% of the net cost of $1200 after the state credit is subtracted. For more information please contact your state energy office or local utility.

How will the Alternative Minimum Tax affect me?
At this time, we believe that purchasers subject to AMT may not receive the full benefit of the credit; however, the IRS has yet to issue a final ruling. To determine how AMT will impact you, speak with a tax professional.

At this time, we believe that purchasers subject to AMT may not receive the full benefit of the credit; however, the IRS has yet to issue a final ruling. To determine how AMT will impact you, speak with a tax professional.

Here are some terms you should be familiar with:

• SEER – Seasonal energy efficiency ratio, a measurement of performance throughout the cooling season
• EER – Energy efficiency ratio, another measurement of performance
• COP – Coefficient of performance
• AFUE – Annual fuel use efficiency
• CEE – Consortium for Energy Efficiency
• HSPF – Heat seasonal performance factor
• DOE – U.S. Department of Energy

Can I receive a tax credit for a programmable thermostat?
No.

Where must the equipment be used?
In your primary residence at the time the equipment was installed. Energy-efficient equipment installed in new homes is generally not eligible for the credit since the equipment is installed prior to occupancy. However, it may qualify the home for the new-home tax credit. Consult with your tax advisor.

What paperwork or forms do I need to prove improvements were made, and where can I find them?
Customers would use the energy efficient appliance credit (IRS Form 8909) for each type of qualified improvement installed in 2006 and 2007. More information will become available in the 2006 IRS instructions for the version of 1040 tax form you file.

What do I need to do to qualify for the incentives?
Under the IRS rules, manufacturers must certify the performance of equipment for eligibility in the program. Obtain a certificate of performance when buying these products from the contractor. Certifications need not be submitted to the IRS, but should be kept on file in case the IRS has questions. Homeowners should also make notes on when each eligible measure is installed – only equipment placed in service in 2006 and 2007 is eligible.

Who is eligible for the incentives?
The person or organization making the expenditures is generally the recipient of the allowed tax deductions.

I own an apartment building. Do the improvements I have made within the building qualify for a credit?
If the building is not your primary residence, you cannot claim the consumer credits. Specific guidelines and the final ruling on this are to be determined by the IRS. Some rental property owners may qualify for tax deductions under the commercial buildings incentives.

Information provided by ACCA.


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