Saving the Earth (and a Little Money)

If signed, the Energy Tax Incentives Act would offer some nice breaks for homeowners.
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If the president signs the Energy Tax Incentives Act of 2005, you may want to consider replacing those old windows that let you feel the winter wind -- even when they're closed.

For tax years 2006 and 2007, you could get a credit on your return for some of the energy-efficient paraphernalia you add to your home.

Granted, the act's tax incentives are not going to send you to Aruba, but as always, every little bit counts.

The good news is that as long as you make these improvements to your existing home, you'll get the credits whether you itemize your deduction or take the standard deduction on your 2006 and 2007 tax returns. So we'll just give you a heads-up on some of them now so you can plan your home remodeling accordingly.

The first credit applies to the various ways you insulate your principal residence to reduce heat loss or gain. It maxes out at a whopping $500 and is made up of the following:

Ten percent of the expenditures used to improve the building envelope can be applied to the credit, says Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals. That's congressional jargon for your exterior doors, insulation, and certain kinds of metal roofs that have a special coating applied to reduce heat loss.

If you replace old windows with new, energy-efficient ones, you can apply $200 of that cost to this credit. Granted, if you've ever replaced a window in your home, you know that $200 will barely cover the cost of one window, never mind the whole house. So at least consider replacing a few at a time the next two years.

You'll get a $50 credit for each main air-circulating fan you install, says Scharin. Clearly, we're not referring to the little oscillating fans you bought in college for your dorm room. The credit applies only to attic fans and other big fans that are installed in your home, specfically to improve your energy efficiency.

If you buy a natural gas, propane or oil furnace, or a hot-water boiler over the next two years, you'll get a $150 credit for that purchase. Again, it's not an earth-shattering amount, but you at least plan your purchases and get something back.

And finally, tack on $300 if you install central air or energy-efficient water and heatingpumps.

Remember, all these improvements are included in this $500 credit, so pick your upgrades accordingly.

The next credit focuses on solar heating. If you spend money on photovoltaic property, (their words, not mine), like solar water heaters that use the sun to generate electricity, then 30% of those expenditures, up to $2,000, will be credited back to you on your tax return.

Big note: If that solar power is used to heat your swimming pool or hot tub, you can't get the credit (but, in that case, you should probably invite me for a swim).

Then there's the hybrid car credit that no one really understands yet. "It's so complicated because it depends on how efficient the car is," says Scharin.

Unfortunately, the credit is dependent on the number of cars the manufacturer sells. Right now, there is a cap at 60,000. So the consumer gets a credit if he buys one of the first 60,000 hybrid cars the manufacturer produces. But it's clearly unfair to companies like, say, Honda, which has been selling hybrids for a while now, notes Martin Nissenbaum, national director of personal income tax planning at Ernst & Young. "Honda is almost up to its limit already," he says. So there's no tax incentive for future Honda purchasers.

Either way, if you buy a hybrid car in 2006 or 2007, be sure to discuss your applicable credit with your dealer.

And to all you builders out there, you'll get a credit for constructing an energy-efficient home. The credit maxes out at $2,000.

Granted, this act isn't signed and all things are subject to change. So just consider this a heads-up, especially if you are planning on remodeling or upgrading around your house. At least mention those purchases to you accountant come tax time and, with any luck, you'll see some extra change in your pocket for your efforts to save our planet.