Daily Deduction: Energy Tax Credits

Summer is almost here, and wherever you look, things are turning green.  It seems like every company has a new, environmentally friendly product to sell.  Sure, the ads can be overwhelming, but did you know that some of those products can turn into tax credits on your federal Form 1040?  That’s because a new law rewards taxpayers for making energy efficient improvements to their homes.

Adding energy efficient heating, windows and other improvements makes sense, even without the tax break.  They lower your monthly electric bill, and they also add value to your home.  But in case you need an extra nudge, the American Recovery and Reinvestment Act has added two helpful tax credits to the mix.  The first applies to energy efficient home improvements, and the second applies to equipment that actually produces alternative energy.

How do the credits work?  Let’s start with home improvements.  If you purchase energy efficient windows, doors, insulation, roofing, a furnace or other supplies, you can reduce your tax bill using the residential energy property credit.  The credit is 30% of the total cost of your improvements.  For example, if you owe $1,000 in taxes, and you spend $500 on new energy efficient insulation, you can claim a credit of $150 and reduce your tax bill to $850.  It’s like receiving a $150 coupon at tax time.  Now that’s window shopping!

The credit is limited to $1,500, and you should ask the retailer or manufacturer to certify that the product you purchase is eligible for the credit.  Until June 1, doors and windows certified by Energy Star qualify, but after June 1, stricter standards will apply.

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