Now that you finally paid off that nagging credit card bill with your 2010 tax refund, you’re anxious to purchase new energy efficient windows and lower your 2011 taxes with the Residential Energy Tax Credit. Going Green is socially responsible, but before you break the bank make sure you understand how changes in the law will impact your taxes. Although it is still available, effective January 1, 2011, the credit for energy-saving home improvements was decreased. There are also many other new rules depending on what appliance you install.
What Is The Residential Energy Tax Credit?
It’s a tax credit given by the IRS to reward homeowners for making eligible energy-saving improvements to their principal residences. A tax credit directly increases your refund or reduces your tax liability. A principal residence is a home that you own and live in most of the time.
Home improvements eligible for the credit are:
• Biomass stoves, heating, ventilating, air conditioning, water heaters, and installation costs for these items.
• The costs of windows, skylights, energy-efficient doors, insulation, and certain roofs also qualify for the credit.
Another related credit available to taxpayers is the Residential Energy Efficient Property Credit. This tax credit remains unchanged for 2011 and covers qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.
How Did the Residential Energy Tax Credit Change in 2011?
In 2010, the Residential Energy Tax Credit was 30% of the cost of eligible energy saving home improvements up to $1,500, but now the credit is considerably lower as follows:
• 10% up to $500 for insulation, roofs, and doors
• Windows capped at $200, but must meet ENERGY STAR qualifications
• Furnace and boilers capped at $150
• $50 for advanced main air circulating fan
• $300 for air conditioners, air source heat pumps, water heaters, and Biomass stoves
• $500 lifetime limit. If you received over $500 in these tax credits from 2006-2010, you are not eligible for anything more.
Most Common Reasons You May Not Receive the Tax Credit You’re Expecting
1. Appliances such as refrigerators, dishwashers, washers, and dryers are not eligible for the credit even if they carry the Energy Star label. Your state may have a rebate program for these types of appliances. Check with your individual state online.
2. The energy credit is a non-refundable credit. Non-refundable tax credits are tax credits that cannot be more than your tax liability. For example, if your tax liability is $250, you will not be eligible for a tax credit greater than $250.
3. Beginning January 1, 2011, there is a $500 lifetime limit on the tax credit, so if you already received energy efficiency tax credits from 2006-2010 that counts toward the limit and it can’t go over the new limit of $500.
Claiming the Residential Energy Tax Credit
If you took the steps to make your home green in 2011 and your purchases meet the new eligibility requirements, congratulations! You can claim the credit on IRS Form 5695 and file it with your 2011 taxes. Don’t worry about the calculations. TurboTax guides you and follows IRS guidelines to calculate the correct energy tax credit based on your entries. Make sure you save all of your receipts and the Manufacturer’s Certification Statement for your records.
Still trying to decide whether to make your home energy-efficient? Compare the cost of your energy-efficient improvement with what you will be saving in energy costs. Also, make sure the product meets the new eligibility requirements according to the Manufacturer’s Certification Statement. The Manufacturer’s Certification Statement certifies that the product qualifies for the tax credit. Go to the Energy Star website for more information. Haven’t filed your 2010 taxes yet? Check our Take the Chill Off blog for the 2010 residential energy tax credit law.