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Bankrate's 2008 Tax Guide
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TAX TIP No. 28
Energy enhancements pay off at tax time
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Dollar and time limits apply
There is a downside to Uncle Sam's support of home energy improvements.

As noted previously, the tax credit has its dollar limits. Typically, it is limited to the lesser of 10 percent of the cost of the eligible improvement or the specific dollar amount (listed previously).

In addition, there is an overall credit limit of $500 on the improvements.

Even more restrictive, that $500 limit applies to home improvements made in 2006 and 2007. So if you claimed $400 for home energy upgrades on your 2006 return, you can only claim $100 for any additional improvements made in 2007.

Taxpayers who take the solar route get a bit more tax leeway. The $2,000 credit for those residential energy upgrades are available on an annual basis. So if you put in a solar heating system in 2006 and claimed $2,000 on that return, and continued your solar upgrades in 2007, you can still claim up to $2,000 on this year's return.

There also are time limits. The general energy improvements provision expired at the end of 2007, although there is some indication that Congress would like to extend the tax credit for at least another year. The solar provision was extended, but it will expire at the end of 2008.

Related home tax issues
While a single family structure typically comes to mind in connection with "home," the IRS points out that its definition is more encompassing.

Your home is where you lived in 2007, and that may include a house, houseboat, mobile home, co-op apartment, condominium or a manufactured home. As long as one of these structures was your main residence, i.e., you lived there most of the year, eligible energy upgrades you made are eligible for the credit.

For credit purposes, notes the IRS, costs related to the credit are considered paid when the installation of the original energy efficient item is completed or, if you're building your home making substantial structural changes to an existing property, when you actually begin living in the home.

And be sure to keep a record of your improvements and associated tax credits. They could affect how much tax-free profit you get when you sell your energy-enhanced home. You must reduce the basis in your home, which is used to determine your home-sale exclusion amount, by the amount of energy-efficient credits you claim.

More on eligible energy improvements can be found in the Bankrate story, "Get tax credits for energy improvements." The tax breaks associated with window film installation are detailed in the Bankrate story, "Window tinting can mean a tax credit." The Energy Star Web site also offers a comprehensive table of the eligible tax credit improvements.

-- Updated: Feb. 11, 2008
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