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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Small tax credit for big home energy improvements
Tax Talk

Dim view of energy incentive
 

Dear Tax Talk:
I want to confirm that the credit given for energy-saving improvements is limited to a maximum of $500 over the lifetime that this credit exists. I had claimed $500 in 2006.

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I had windows installed in 2007 that would be allowed under the energy credit guidelines, but upon researching the publication, I learned that you only get one $500 credit. I guess I was surprised at this. The improvements that save energy, air-conditioning units, furnaces, windows, etc., are expensive. One $500 credit doesn't seem to be an incentive to install energy improvements.
-- BJ

Dear BJ,
Back in 2005, when a barrel of oil was about half of what it is now, Congress and the White House got together and produced the comprehensive Energy Policy Act of 2005. In hindsight it appears that the policy was a day late and a few dollars short. You're right, the credits aren't all that much compared to the cost of the improvements. Think of the credits as that rebate that you forget to mail in, but you still feel good about your purchase.

A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax directly, while a deduction or allowance only reduces taxable income. The reduction in tax from a deduction is only a fraction (the marginal tax rate) of the deduction, whereas the credit is equivalent to a rebate.

Tax credits are available 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 to your primary residence from Jan. 1, 2006 through Dec. 31, 2007. If you received the maximum credit in 2006, you cannot claim additional credit in 2007 on the same category of items.

A separate credit of up to 30 percent of $2,000 ($600 maximum credit) in costs for installing solar energy systems is available. The credit for a hybrid car is in addition to these credits. Form 5695 is used to claim residential energy credits and Form 8910 is for hybrid cars.

Bankrate.com's corrections policy -- Posted: Jan. 24, 2008
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