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Earning tax credit for improvements

Cut Your Utility Bills by James Dulley

Printed in The Charlotte Observer Home Section, February 10, 2007

Architect's comment:  This article is outdated on the dollar amounts of the tax credits.  Our new administration has greatly increased the tax credits.  You can go to the IRS website to "Tax Credits" to view updated credits and amounts and time limits.

Q. I heard about the new energy tax credit for improvements. How long are they effective and what home items are covered?  Also, will these credits save enough to make it worthwhile to make improvements?

You make a good point about the savings from the tax credits. In my opinion, the credits are not large enough to provide a real incentive for someone to make energy-saving improvements unless they were already planned. Several contractors and manufacturers told me they have not seen a significant increase in sales of efficiency items as a result of the credits.

One problem is people may not realize these are tax credits and not just tax deductions. A tax credit actually reduces your tax bill by the total amount of the credit. A tax deduction reduces just the taxable base, so the actual savings you realize depend upon your specific tax bracket. In the 25% bracket, a $500 tax credit is equivalent to $2,000 income.

The Energy Policy Act of 2005 covers most typical energy conservation improvements to your home. These include insulation, replacement windows and improvements, doors, metal roofing, heating and cooling systems, water heaters, and solar systems. In most cases, the improvements must meet the 2000 IECC (International Energy Conservation Code) specifications.

The energy act was enacted for only two years, so your energy efficiency improvements must be installed by the end of 2007. With the recent changes in control of the Congress, there is a better chance the energy tax credits will be expanded and extended past 2007.

There are limits on the amount of the tax credit depending upon the specific efficiency improvement. Many of the credits are for about 10% of the installed cost up to a maximum of $500. The total tax credit allowed for the two year period is $500.

Using alternative fuels and heating provides the largest tax credit of 30%, up to a maximum of $2,000. These include solar water heating and photovoltaics (solar cells_ and fuel cells for producing your own electricity at home.

Door improvements provide a higher maximum tax credit that replacement windows even through replacing windows will save more energy. Installing efficient exterior doors and/or storm doors gets a $500 maximum credit. Installing efficient windows, skylights and storm windows gets only $200.

If you need a new roof, consider installing a metal one that blocks heat. Metal roofs last a lifetime, and you will receive a $500 tax credit. Installing a new heat pump provides up to a $300 credit compared to a new gas or oil furnace (efficiency of 95%) for only a $150 credit. Adding an efficient variable-speed blower will net you another $50.

Installing an efficient gas, oil or propane water heater provides a $300 credit. Standard tank-type electric water heaters are not included. If you have an electric water heater, you can get a $300 credit by installing a heat pump water heater.

Lindsay Daniel provides residential design services to Charlotte, North Carolina and the surrounding communities.