Volume 3 Number 29
July 17, 2006

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TAX CREDITS FOR IMPROVEMENTS THAT WILL STRENGTHEN YOUR HOME

The IRS is giving tax credits for many types of home improvements including adding insulation, replacement windows, and certain high efficiency heating and cooling equipment.  The maximum amount of homeowner credit for all improvements combined is $500 during the two-year period of the tax credit. This tax credit applies to improvements made from January 1, 2006 through December 31, 2007.

HIGHLIGHTS OF THE ENERGY POLICY ACT OF 2005 FOR INDIVIDUALS

During 2006, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns next year. The new law provides tax credits for making your principal residence, which must be in the United States, more energy efficient and for buying certain energy efficient items. At the same time the law provides credits for various types of alternative motor vehicles, including hybrids.

CREDITS FOR INDIVIDUALS WHO MAKE THEIR HOMES MORE ENERGY EFFICIENT

A recent tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

  • Insulation systems that reduce heat loss/gain
  • Exterior windows (including skylights)
  • Exterior doors, metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

  • $50 for each advanced main air circulating fan
  • $150 for each qualified natural gas, propane, or oil furnace or hot water heater
  • $300 for each item of qualified energy efficient property.

The maximum credit for all taxable years is $500 – no more than $200 of the credit can be attributable to expenses for windows.

Additionally, the new law makes a credit available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity –only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity. Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub.

Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.

These items must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008.

IRS UNVEILS PROCEDURE ENABLING COMMERCIAL PROPERTY OWNERS TO QUALIFY FOR ENERGY EFFICIENT DEDUCTION

The Internal Revenue Service issued a notice on how commercial building owners or leaseholders can qualify for the tax deduction for making their buildings energy efficient. The notice establishes a process to certify the required energy savings in order to claim the deduction.

The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings.

The amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50-percent energy savings target. The notice provides that buildings below the 50-percent threshold may, nevertheless, qualify for a deduction of up to 60 cents per square foot of building floor area if they meet a 16⅔-percent energy savings target.

Before claiming the deduction, the taxpayer must obtain a certification that the required energy savings will be achieved. The notice prescribes the content of that certification and the qualifications that must be met by the person providing the certification.

The notice also announces that the Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list.