Tax Credits for Energy Efficiency


These days it pays to go green…literally. There are several tax credits available for home improvements, electric cars, and other energy-efficient products. But some of these credits are scheduled to expire at the end of 2011, so if you haven’t made these purchases yet, you will have to act fast to cash in on these green tax breaks.

The history of green tax credits

In 2005 Congress created tax credits for energy-efficient home improvements and certain types of fuel-efficient vehicles. These credits expired after 2007 but were reinstated, with changes, in 2009. The Tax Relief and Job Creation Act of 2010 extended the credits through the end of 2011, but with the rules that were in place for 2006 and 2007.

All of this brings us to today. As of mid-December, taxpayers have only a few weeks left to cash in on some of these credits, which expire at the end of the year. (But as we have seen, just because a tax break expires, doesn’t mean it is gone for good. Congress may very well decide to reinstate the credits in 2012. Of course, trying to predict what Congress will do next year, an election year, is no easy task.)

Home improvements

If you did any projects in 2011 to improve the energy efficiency of your home, there is a good chance that you can qualify for tax credits of up to $500. The Nonbusiness Energy Property Credit applies to the following types of home improvements:

  • Exterior windows, including skylights and storm windows

  • Insulation, exterior doors, or roofs, including seals to limit air infiltration, such as caulk, weather stripping and foam sealants, as well as storm doors

  • Central air conditioners, heat pumps, furnaces, boilers, water heaters, or biomass stoves

In order to claim this tax credit, you will need to fill out IRS Form 5695 with your tax return.

The tax credit, which is capped at $500, equals 10 percent of the cost of the improvements. Labor costs cannot be included for insulation, windows, doors, and roofs, but labor costs can be included for heating and air conditioning systems, water heaters, and stoves that burn biomass fuel. Plus, only $200 of the credit can be used for windows.

The credit has a lifetime limit of $500. This means that if you claimed the credit in previous years, the amount of the credit available to you in 2011 is reduced by the previous years’ credits.

The credit applies only to improvements made to the taxpayer’s principle residence, and any windows, doors, insulation, and roofs must be expected to last at least five years. The credit applies to improvements that were installed during 2011, so items that were purchased during the year but never installed do not qualify.

Alternative energy equipment

Solar water heaters, solar energy panels, geothermal heat pumps, and wind turbines can provide generous tax credits of 30% of the equipment cost, including installation. This credit, which is called the Residential Energy Efficient Property Credit, is available through 2016 and applies to equipment that provides energy for a primary residence. (Solar water heaters used for swimming pools or hot tubs do not qualify.)

Plug-in electric cars

Taxpayers who purchase plug-in electric vehicles can receive a large tax credit. The minimum credit is $2,500 and can reach up to $7,500 depending on the vehicle’s battery capacity. Before 2011, tax credits were available for a wider range of fuel-efficient vehicles, including hybrid or diesel vehicles. But starting in 2011 the credit is available only for plug-in electric vehicles.

At a time when everyone is looking for ways to cut back, investing in energy-efficient products can be an attractive option. In addition to reducing pollution, you can also reduce your energy bills and tax bills. If you have any questions about how to cash in on these energy-efficient tax credits, we are happy to help. You can contact us at 773.525.6171 orbart@eiltscpa.com.

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