The Power of
part of a large energy law passed last year, individual
taxpayers can claim a tax credit for qualified purchases to
make their homes more energy efficient. Last week, the IRS
the type of home improvements that qualify for the energy
credit. (IRS Notice 2006-26) As you know, tax credits
are more valuable than tax deductions, because they reduce
your federal (and possibly state) income tax liability dollar
Builders: Energy Efficiency Pays
Under the Energy Policy Act of 2005, an
eligible contractor who constructs a qualified new
energy efficient home can qualify for a credit of up to
$2,000. The credit is available for all new homes,
including manufactured homes constructed in accordance
with the Federal Manufactured Homes Construction and
new IRS guidance (Notices 2006-27 and
2006-28), a home qualifies for the credit
located in the United
Construction is substantially
completed after August 8,
the statutory energy saving
is acquired from the eligible contractor after December
31, 2005, and before January 1, 2008, for use as a
In general, to meet the energy
saving requirements, a home must be certified to provide
a level of heating and cooling energy consumption that
is at least 30 to 50 percent in the case of manufactured
homes, and 50 percent for other homes below that of a
comparable home constructed in accordance with the
standards of the 2004 Supplement to the 2003
International Energy Conservation Code. It must
also have building envelope component improvements
providing a level of heating and cooling energy
consumption that is at least 10 percent below that of a
Manufactured homes can also
qualify for the credit by meeting Energy Star
Site-built homes qualify for a
$2,000 credit if they reduce energy consumption by 50
percent relative to the International Energy
Conservation Code standard.
Manufactured homes qualify for a
$1,000 or $2,000 credit depending on the level of energy
savings achieved. The new IRS guidance provides
information about the certification process that a
builder must complete to qualify for the credit. It also
provides a list of software programs that can be used to
calculate energy consumption for purposes of obtaining a
certification. Your tax adviser can provide more
Credit for Residential
This personal tax credit has a $500 lifetime limit, but
it's broad enough that many individuals can benefit. The
credit only applies to energy-saving items you put to use
after December 31, 2005 and before January 1, 2008.
The credit equals the sum of 10 percent of your
expenditures for qualified energy efficiency improvements to
an existing home. To qualify, a component must meet or exceed
the criteria established by the 2000 International Energy
Conservation Code (including supplements) and must be
installed in the taxpayer’s main home in the United States.
Vacation homes are not eligible.
The following items
Insulation systems that reduce heat loss or gain.
Exterior windows (including skylights). However, of the
$500 lifetime credit, only $200 can be for windows.
Metal roofs (meeting applicable Energy Star
In addition, the law provides a credit for costs relating
to residential energy property expenses. To qualify as
residential energy property, the property must meet
certification requirements prescribed by the Secretary of the
Treasury and must be installed in the taxpayer’s main home in
the United States.
The following items are eligible:
$50 for each advanced main air circulating fan.
$150 for each qualified natural gas, propane, or oil
furnace or hot water heater.
$300 for each item of qualified energy efficient
Additionally, the new law makes a credit available to those
who add qualified solar panels, solar water heating equipment,
or a fuel cell power plant to their homes in the United
States. In general, a qualified fuel cell power plant converts
fuel into electricity using electrochemical means, has an
electricity-only generation efficiency of more than 30 percent
and generates at least 0.5 kilowatts.
Credit for Other Residential
can also claim a separate personal tax credit equal to 30
percent of the cost of:
Qualified solar water heating equipment
(maximum credit of $2,000).
Qualified electricity generating solar
photovoltaic property (maximum credit of $2,000).
Qualified fuel cell property (maximum credit of
$500 for each .5 kilowatt of capacity).
Note: You cannot claim the credit for
equipment used to heat a swimming pool or hot tub. The credit
for fuel cell property is only available for your principal