Cooling a tax bill with energy credits

2 min read

Dear Tax Talk,
If you have to replace the compressor on your air conditioning system, can that big expense be written off at tax time? If so, what tax form is used?
— B

Dear B,
Congress figured that an air conditioner may keep you from getting hot under the collar when you do your taxes so they came up with an energy credit. The energy credit for home improvements applies to purchases made in 2006 and 2007. You receive a credit up to a certain limit. A tax credit can provide significant savings. It reduces the amount of income tax you have to pay or increases your refund dollar for dollar. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces the tax itself.

If you read the IRS guidance on the energy credit, you’ll come away not understanding what it means. I think it was written by engineers. Various items that make a home more energy efficient qualify for the credit. In addition to air conditioners, you can receive a credit for windows, doors, insulation and roofing. The credit is capped at $500 for all years (2006 and 2007) for home energy-efficiency improvements.

The maximum credit available for an air conditioning unit meeting the required energy-efficiency ratings, or EER, is $300. Not all EnergyStar labeled products guarantee that the item will qualify for the credit, so beware of the rules. The EnergyStar Web site does an excellent job of describing the items qualifying for credits in laymen’s terms and the various levels of credits available.

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