Tax Tips
January 2007
2005 Tax Legislation: Energy Act of 2005 - Energy Efficiency Tax Breaks for Individuals
The recently-enacted Energy Tax Incentives Act of 2005 provides significant tax breaks for individual homeowners who spend money in 2006 and 2007 to install specific energy-saving devices. In addition, starting in 2006, a new tax credit will be available for the purchase of some hybrid vehicles, as well as the purchase of some other, more exotic "green" vehicles. Clearly, the Energy Tax Incentives Act of 2005 is not just for "Big Oil."
Like all tax laws, there are rules that must be followed to get the benefit of the new energy tax breaks. Some of them are quite complex. This letter is intended to introduce you to the basic energy tax credits and deductions that will be available to you.
Impact on consumers
- The residential energy efficient property credit,
- The home improvement energy credit, and
- The alternative fuel vehicles credit.
All of these credits are in effect for 2006 and 2007 only, for property placed in service in those tax years.
Going solar. The "residential energy efficient property credit" is all about converting your home to solar energy. There are three ways take the credit, and three separate amounts allowed for doing it. The new law makes available:
- A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing of residential solar water heating;
- A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing photovoltaic equipment for solar-generated electricity; and
- $500 for each 0.5 kilowatt of fuel cell property capacity.
Although there is some debate in Washington over exactly what Congress meant, apparently the $2,000 credits for solar water and electricity apply to any residence, including vacation homes, while the fuel cell credit is restricted to installation in your principal residence.
Home improvement energy credit. Uncle Sam is offering you $500 to install certain energy saving improvements in your home. Energy conservation property, such as energy-efficient residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters installed in 2006 and 2007, qualify.
The $500 credit may be taken in any one of two ways, or in combination:
- A dollar-for-dollar credit for residential energy property expenditures plus
- 10 percent of the cost of qualified energy efficiency improvements.
"Residential energy property expenditures" include:
- Up to $50 for an advanced main air circulating fan;
- Up to $150 for any energy-efficient qualified natural gas, propane, or oil furnace or hot water boiler, and
- Up to $300 for energy-efficient building property, which includes electric and geothermal heat pumps, open loop, direct expansion, central AC, and natural gas, propane or oil water heaters.
"Qualified energy efficiency improvements" -- for which 10 percent of your purchase and installation costs are allowed to count toward the $500 home improvement energy credit---consist of "energy-efficient envelope components satisfying the 2000IEC Code." They include insulation materials; exterior doors; and metal roofs with special pigmented coatings. Exterior windows, including skylights, are also on the list, but they are subject to a special expense limit. The list specifically does not include insulated drapes. It also does not include any improvement that does not meet 2000IEC Code. The IRS is expected to come out with a more detailed list soon.
Qualifying property must be installed in your principal residence. Vacation, second homes, rental properties or a foreign residence do not qualify for any part of this credit. And while most do-it-yourself installations are allowed, you will need to prove date of installation and you would not be able to add in the cost of your own time.
"Green" vehicles. New tax credits are available for hybrid, fuel cell, advanced lean burn diesel and other alternative power vehicles, replacing the current deduction for clean fuel (including hybrid) vehicles. The credits are collectively claimed under the title of the "Alternative Motor Vehicle Credit." This credit is equal to the sum of the four separate credit components:
- The new qualified fuel cell motor vehicle credit;
- The new advanced lean burn technology motor vehicle credit;
- The new qualified hybrid motor vehicle credit;
- The new qualified alternative fuel motor vehicle credit.
Most individuals will only be able to take advantage of the qualified hybrid motor vehicle credit since only they are being mass produced by the major automakers. Unlike the rules for 2005, however, a qualified hybrid motor vehicle no longer includes many heavy SUVs. Nor will it include many high-performance hybrids that do not appreciably decrease fuel consumption from their smaller-engine gasoline counterparts.
The amount of the credit for a hybrid vehicle is based upon the percentage increase in fuel economy from an all-gasoline model and varies from $400 to $2,400, based on fuel savings ranging from 125 to 250 percent of a base amount. An additional conservation credit is awarded to hybrid vehicles with certain lifetime fuel savings ratings, ranging from $250 to $1,000.
Effective dates
A word about effective dates. The energy tax incentives apply to equipment placed in service after December 31, 2005 and before January 1, 2008. Some complex issues surround these 2006 and 2007 benefits. Time of installation rather than payment controls. An installation taking place now might still qualify for the credit if it is not completed sufficiently to be substantially ready for use until 2006.
Maximizing your tax benefits
There are lots of tax benefits available in the new energy law and lots of fine print that, if you're not careful, can prevent you from maximizing your savings. Logistically, of course, you not only need to keep your eye on the tax rules, but also on what improvements will maximize your energy savings, the price for the improvements, and the availability of a contractor to install them. Give our office a call today. We can help lighten the load on the tax side of your plans when you are ready.
All of the tax opportunities and considerations at this time of year can be a lot to remember, and the details of all these provisions can make it even more complicated. Fortunately, you won't have to remember all of them by yourself -- that's why you hire a tax professional. The two most important pieces of tax advice to keep for any year are to keep good records and ask questions. We look forward to hearing from you.
If you have any questions as to how these rules apply to
your particular situation, please do not hesitate to call
the Certified Public Accountants at Wood, Johnson, Heath,
P.C. at 512-343-8075.
