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George Saenz, the Tax Talk columnistTax breaks for energy savings

Dear Tax Talk,
How far back can you claim an energy savings deduction? I replaced the windows two years ago and the water heater a year ago. Thanks for your help.
-- C. J. L.

Dear C. J. L.,
Unfortunately you're a little ahead of the game on making the improvements that will garner you energy savings credits. Beginning in 2006, you might be able to claim a new tax credit for the purchase of qualified energy-efficiency improvements and property to your existing home. You also may be able to claim a tax credit for the purchase of residential solar water heating, photovoltaic equipment or fuel cell property. This credit is only applicable if you're contemplating solar water heating for something other than a pool. In addition, contractors are eligible for tax credits for making energy-efficient improvements to new homes.

Most folks will be looking at the credit for improvements and property such as windows, insulation, roofing and certain appliances (property) such as water heaters, furnaces and air conditioners. For property installed in 2006 and 2007, there is a 10-percent nonrefundable credit for the purchase of energy-efficiency building envelope components that meet or exceed the criteria of the 2000 International Energy Conservation Code in effect on Aug. 8, 2005 (or the Energy Star program requirements for metal roofs with pigmented coatings). The credit is also available for other specified property. Nonrefundable means you won't get any money back, even if the amount of the credit exceeds what you owe.

The credit allowed may not exceed $500 in total across all tax years, and no more than $200 of the credit may be attributable to expenditures on windows. Further, the credit is limited to $50 for each advanced main air-circulating fan, $150 for each qualified natural gas, propane or oil furnace or hot water boiler, and $300 for each item of qualified energy-efficient property. In the case of property (versus improvements) the amount is allowed as a credit, dollar of dollar, up to the maximum allowed. For example, if you buy a $300 energy-efficient water heater, you'll receive a $150 tax credit, which is the maximum for that category.

Building envelope components are:

  • insulation materials or systems that are specifically and primarily designed to reduce the heat loss or gain for a dwelling;
  • exterior windows (including skylights) and doors; and
  • metal roofs with appropriate pigmented coatings that are specifically and primarily designed to reduce the heat loss or gain for a dwelling.

Ten percent of improvement costs qualify with a maximum of $200 for the windows. The nuances of the rules are complex and I hope will be easier to understand when IRS releases the 2005 Publication 553.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: March 1, 2006
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