It may have been your dream house when you bought it, but most homeowners soon come up with a long list of ways to improve it. While ideas are never in short supply, the money to carry out those home improvements is often lacking.

The good news is the Internal Revenue Service often offers assistance to homeowners remodeling, renovating and otherwise improving their homes. A collection of tax incentives for homeowners to make energy-efficient improvements took effect in 2006. "Depending on how you slice and dice it, there are two or three credits in this area," says Mark Luscombe, principal tax analyst at CCH, a tax publisher and software provider.

The tax-favored home improvements range from replacing windows and doors, to adding insulation or special roofing material, to converting heating and cooling systems to solar power.

The best thing about these tax breaks is that they are credits, which reduce IRS bills dollar for dollar. And while some credits are phased out once a taxpayer earns a certain amount, these credits are available to any homeowner, regardless of income.

The home energy credits, however, do have some limits. There are different credit levels for various home projects, and those that are most common and easiest to install provide the smallest credits.

Energy improvements
Overall, the Energy Tax Incentives Act of 2005 established a 10 percent tax credit with a lifetime cap of $500 for conventional technology home improvements. The credit is based on the cost of new energy-efficient improvements including insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces and hot water boilers.

Within each conventional energy-saving category, the specific credit amounts also are limited. And the $500 cap applies to total energy upgrades made in both 2006 and 2007, not separately for each year. So if you claimed the maximum $500 worth of eligible energy improvements in 2006, you get none in 2007.

This portion of the credits expires Dec. 31. Tax breaks for solar-related upgrades, however, are allowed on an annual, not cumulative, basis and these credits will continue through 2008.

Solar tax savings
Homeowners who opt for the more expensive solar renovations can claim up to $2,000 in credits each year. Qualifying home improvements that count toward that annual amount include solar water-heating systems, solar equipment that generates photovoltaic electricity for the home and fuel-cell power systems.

The IRS has issued official guidance on the residential tax credits, and official EnergyStar.gov has transferred those details to a helpful chart.

"Buy the right things," says Donna LeValley, attorney and contributing editor of "J.K. Lasser's Your Income Tax 2007." "Take the chart to the hardware store to help you find what can give you a tax break."