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Bankrate's 2008 Tax Guide
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Daily tax tip
TAX TIP No. 28
Energy enhancements pay off at tax time


If you made certain energy efficient improvements to your home last year, you can finally claim them on your 2007 tax return.

In this tax tip:
 
 

The Energy Tax Incentives Act of 2005 created a tax credit for some improvements that enhance a property's energy saving properties. The write-offs range from $50 for the installation of a whole-house circulating fan to $2,000 for conversion to a solar water-heating system.

But taxpayers had to hold off on making their claims until Feb. 11 because the necessary tax paperwork, Form 5695, was one of five that the IRS couldn't immediately process. The documents contained information connected with alternative minimum tax and since changes to that law were made late last December, the IRS needed the extra weeks to ensure that its computers could handle the changes.

Now, however, the millions of taxpayers who used one of these forms and who've been holding onto their returns can send them to Uncle Sam.

Eligible energy improvements
At least the delay should be worth it for energy-conscious homeowners. The energy efficient home improvement tax break is a credit, which is better than its counterpart, the tax deduction.

Deductions reduce your taxable income, which should lower your eventual tax bill somewhat. Credits, however, offer you a dollar-for-dollar tax savings. If you owe the IRS $1,000 and can claim a $500 tax credit, your bill is immediately cut in half.

Under the energy law, you generally can claim a tax credit for up to 10 percent of the cost of certain home improvements that make your residence more energy efficient. However, in some cases, there are more specific limits. Eligible improvements and limits where applicable include:

Improvements that earn credit
Whole house fan ($50 limit).
Insulation.
Window film.
Replacement windows ($200 limit).
Exterior doors.
Metal roof treated with energy efficient paint.
Propane, natural gas or oil furnace or water heater ($150 limit).
High-efficiency air conditioners and furnaces ($300 limit).

The eligible products and improvements must follow International Energy Conservation Code, or IECC, standards. In most cases, the qualifying designation will be noted on the product, usually with an Energy Star emblem, or documentation verifying that it meets IECC guidelines will be provided at the time of purchase or installation.

In addition to the more common home improvements listed, some more energy-saving -- and more costly -- solar upgrades could net you a bigger tax credit. If you install a solar-powered water heater or a solar system that generates photovoltaic electricity for your home, you can claim a credit for up to 30 percent of those costs up to a $2,000 maximum.

-- Posted: Feb. 11, 2008
 
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