Tax breaks for home energy upgrades

  • Provisions in the stimulus bill expand tax breaks for energy upgrades.
  • The law lets homeowners claim a $1,500 credit for upgrades in 2009-2010.
  • More advanced energy upgrades, such as solar power, get better breaks.

Why do air conditioners always seem to go out on the hottest day of the year? If that happens to you this summer, rather than repairing the old system, you might consider buying a new unit, since Uncle Sam could help you pay for it.

Provisions in the American Recovery and Reinvestment Act of 2009, also known as ARRA or the stimulus bill, expanded tax breaks for many energy-efficient home improvements. Now a homeowner who makes certain energy upgrades by Dec. 31, 2010, could get as much as $1,500 in tax credits. Those who opt for more advanced energy saving systems could get even bigger breaks.

The residential energy tax incentives for the most common improvements actually are a continuation of a credit created in 2005. But under that year's energy bill, claiming the credit wasn't always an easy task.

The credit amount available for relatively simple improvements, such as replacing drafty windows and doors, installing fans and adding insulation, varied by the type of upgrade. Each improvement also had a different price point upon which the eventual tax break was calculated. And there was a $500 lifetime cap on the overall credit that could be claimed.

"In order to get a substantial credit you had to make a number of energy improvements and the reality was that people weren't getting much of a credit," says Edward Smith, tax partner with BDO Seidman in Boston. "They were doing just one or two things."

New and improved tax credit

This cumbersome tax credit system actually lapsed for the 2008 tax year but was brought back for 2009 as part of last fall's financial bailout bill. And with passage of the latest stimulus bill earlier this year, Washington, D.C. lawmakers actually made things simpler for energy-conscious homeowners.

"The February act makes all the difference in the world," says Tom Long, senior tax analyst in the New York City office of the Tax & Accounting business of Thomson Reuters.

In addition to extending the energy-efficient home improvement tax credit through 2010, the ARRA eliminated the complicated structured caps and limitations on the different types of upgrades and replaced the $500 lifetime cap with a $1,500 credit.

The change means that instead of figuring the tax credit a la carte and picking it up in various small pieces, a homeowner now can claim up to 30 percent of the first $5,000 spent on eligible improvements, up to a maximum $1,500 credit, over this and the next tax year.

"For example, if you spent $5,000 on new windows, you would get $1,500 as a credit," says Smith. "Under the old bill, you would get only a $200 credit because of the limitations. It's easier to get what was intended under the bill."

Requirements for the credit

Home improvements must be in place for the tax year, either 2009 or 2010, for which they are claimed. You'll file Form 5695 along with your 1040 for the applicable tax year.

The improvements, in most cases, must be made to your principal residence. This is the home in which you live.


You need to get a "Manufacturer Certification Statement" detailing the improvements. Don't send the document in with your tax return. Just hang onto it and your receipts in case the IRS has any questions about your claim.

The credit can be a big help at filing time, but it is nonrefundable, which means you can use it to help zero out any tax bill you might have, but any excess credit won't produce a refund.

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