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Get tax credits for energy improvements

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Do the basics first
Most homeowners, before leaping into the brave new world of alternative energy, probably made other, easier home imrpovmeents first. These are the upgrades that could provide on your 2007 return a 10 percent tax credit with a lifetime cap of $500 for improving the energy efficiency of conventional technology in your home. A homeowner would have to do $5,000 worth of work to get the full amount. This is in addition to the solar credits.

Insulation materials. This includes exterior doors and certain metal roofs with special coatings designed to reduce heat loss and gain. If your home is more than 20 years old, its insulation probably no longer meets minimum code. Spending money to improve it can pay off in heating and air conditioning costs.

Replacement windows. No more than $200 can be credited against the cost of replacement windows, including skylights. This isn't much, but something's better than nothing when you undertake this effective but expensive upgrade.

Energy-efficient heating and cooling systems. Up to $300 for high-efficiency electric heat pumps and central air conditioners -- those meeting the 2006 Consortium for Energy Efficiency specifications, expected to be 15 SEER and 13 SEER. (SEER is an acronym for seasonal energy efficiency rating and is a gauge of efficiency and performance for residential air conditioners and heat pumps.)

Eligible purchases include:

High efficiency conventional furnaces. Up to $150 can be claimed by homeowners who install a highly efficient furnace or boiler with annual fuel efficiency of 95 or better, or a gas, oil or propane hot water heater with an energy factor of 0.80. A storage water heater's energy factor is a measure of its overall efficiency based on the use of 64 gallons of hot water per day. To achieve an energy factor of 0.80, you must buy a condensing water heater.

A credit of $50 is available for installing a whole house circulating fan. This is a much more powerful version of a ceiling fan, which draws hot air out through the attic or the roof.

The costs of installation as well as equipment are included in calculating the price of these energy improvements. The solar systems can be installed in either a principal residence or a second home as long as it is located in the United States. The systems can't be used to heat a swimming pool or hot tub.

In most cases, you can claim the credit in two years if you have two properties -- use it one year for a main residence and the second year on a vacation home -- even a recreational vehicle or boat could count if you can live aboard. But you can't take the credits twice on the same property. You can, however, spread the credit over more than one year by doing some of the work one year and some of the work the next. If you owe too little in taxes to take the entire credit in one year -- even though you've done the work -- then you can carry forward the portion of the credit you were unable to claim and deduct it in the following year.

Of course, it's always a good idea to check with your accountant if you have any questions about how to claim the credits. And be sure to keep an eye on Congress in case lawmakers eventually decide to also extend the 10-percent portion of the energy home improvements tax law.

Bankrate.com's corrections policy -- Updated: Feb. 25, 2008
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