OCTOBER 2009
Recent law changes encourage taxpayers to make homes energy-efficient
Recent tax law changes have made home energy credits in 2009 and 2010 more valuable than ever from a tax standpoint. In Congress's efforts to encourage energy conservation, both the Emergency Economic Stabilization Act of 2008 (EESA), enacted late last year, and the American Recovery and Reinvestment Act of 2009 (ARRA), enacted early this year, have increased, broadened, and liberalized these credits.
About Tax Credits: Generally, a tax credit is more valuable than a deduction because it allows the reduction in tax liability dollar for dollar by the amount of the credit. A deduction only reduces the amount of income taxed; with the result that tax liability is only reduced by the amount of the deduction times the tax rate.
What is available:
Two similar but different credits are available: the Code Sec. 25C Nonbusiness Energy Property (NEP) credit; and the Code Sec. 25D Residential Energy Efficient Property (REEP) credit. Both credits relate to energy property for the taxpayer's principal residence and are taken on Form 5695.
Code Sec. 25C (NEP)
Individual taxpayers are allowed a personal tax credit, known as the nonbusiness energy property credit, for energy efficient improvements to a dwelling unit in the U.S. owned and used by the taxpayer as the taxpayer's principal residence.
The 2009 Recovery Act modifies and extends the nonbusiness energy property credit in the following ways:
- the 10% credit rate is increased to 30%;
- all energy property that was previously eligible for the $50, $150, and $300 credits is instead eligible for a 30% credit on expenditures for that property;
- the $500 lifetime cap ($200 for windows) is eliminated and replaced with an aggregate $1,500 cap for 2009 and 2010; and
- the credit is extended for one year, through December 31, 2010.
Amount of credit: The 2009 Recovery Act provides that individuals are allowed a credit for the tax year equal to 30% of the sum of:
- (1) the amount paid or incurred by the taxpayer during the tax year for qualified energy efficiency improvements(certified insulation, windows, doors, and roofs), and 2) the amount of the residential energy property (electric heart pump; electric heat pump water heater; central air conditioner; natural gas, propane or oil water heater; advanced main air circulating fan) that meets specific energy efficiency standards) expenditures paid or incurred by the taxpayer during the tax year.
- Also included are energy-efficient biomass fuel stoves. This is a new class of energy-efficient property eligible for the credit. This is a stove that burns biomass fuel to heat a dwelling unit located in the U.S. that the taxpayer uses as a residence, or to heat water for use in the residence, and that has a specified thermal efficiency rating. Biomass fuel means any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including aquatic plants), grasses, residues, and fibers.
The dollar limitations on residential energy property expenditures - $50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, $300 for each item of qualified energy efficient property - have been eliminated.
Credit cap: The aggregate amount of credits allowed to a taxpayer for tax years beginning in 2009 and 2010 may not exceed $1,500.
The lifetime limitation of $500 ($200 for windows) has been eliminated.
This means that taxpayers who had exhausted their $500 lifetime limitation in 2006 and 2007 can now claim an additional $1,500 of aggregate credits in 2009 and 2010.
Effective: The credit is available for property placed in service between January 1, 2009 and December 31, 2010.
Code Sec. 25D (REEP)
Individual taxpayers are allowed a nonrefundable personal tax credit, known as the residential energy efficient property (REEP) credit, for 30% of expenditures made during the tax year for qualified solar water heating, geothermal heat pump, fuel cell, small wind energy, and solar electric property.
Under prior law, the REEP credit for a tax year had dollar limits that applied to these expenditures.
New Law. The 2009 Recovery Act eliminates the REEP credit caps for qualified solar water heating, geothermal heat pump, and small wind energy property, while retaining the credit cap for qualified fuel cell property. Thus, for any qualified fuel cell property expenditure, the REEP credit for any tax year can't exceed $500 for each 0.5 kilowatt of capacity of the qualified fuel cell property to which the expenditure relates.
Effective: Tax years beginning after December 31, 2008.