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Need to Buy or
Sell a Home!
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New Tax Breaks
for Energy Efficient Home Improvements
By: John Pollock
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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.
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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.
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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.
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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.
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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!
About the Author :
John Pollock, Northville, Michigan Learn more about
Energy saving home improvement.
John Pollock has practiced as an attorney in the Detroit,
Michigan area for the past 25 years. His practice focuses on
estate planning, tax and small business matters. John is also
the webmaster of http://www.forms-free-4-all.com a site
offering free legal forms such as durable powers of attorney,
wills, bills of sale, business plans and many others. His
website also provides easy to understand explanations of the
forms and relevant law.
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