Thinking about installing a renewable energy system in your residence? Uncle Sam offers individual taxpayers a federal income-tax credit equal to 30% of the cost of qualified residential energy-efficient property (REEP).
What Systems Can Qualify?
Credit-eligible property includes:
- Solar electric
- Solar water heating
- Geothermal heat pump (uses ground or ground water as a thermal energy source for heating or cooling)
- Small wind energy (generates electricity using a wind turbine)
- Fuel cell (generates electricity from hydrogen and oxygen through an electrochemical process)
The credit covers the cost of both the equipment and its installation, including labor and any piping or wiring necessary to connect it to your home.
The system must meet specified standards for energy efficiency. You should obtain a certification from the manufacturer that the component you are purchasing meets the relevant requirements for the REEP credit. Note that the manufacturer’s certification is different from the U.S. Department of Energy’s Energy Star label; not all products with the Energy Star label meet the credit requirements.
When available, the tax credit is quite generous. For example, let’s say you spend $6,000 on year on a home solar water heating system that meets all requirements for the REEP tax credit. After considering the $1,800 credit ($6,000 × 30%), the system costs you only $4,200.
The home you are installing the equipment in must be located in the United States and you must use it as your residence. The credit is not available for equipment used to heat a swimming pool or hot tub.
Solar, geothermal, or wind energy property can qualify for the credit whether it is installed in your principal residence or another residence. The credit for fuel cell property is limited to equipment installed in your principal residence.
As for cost, the tax law generally places no dollar limits on the credit. However, there is an exception for fuel cell property: The maximum credit is $500 for each 0.5 kilowatt of capacity.
Some states and public utilities offer incentives to encourage the purchase of energy-efficient property. Certain types of incentives may require an adjustment to your purchase price or cost for credit calculation purposes.
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The past few years, Congress has allowed tax credits for energy efficient home improvements. In 2009 and 2010, the tax credit for building envelope and qualified energy property (discussed below) was equal to 30% of qualifying expenses up to a $1,500 credit. Tax credits for alternative energy products (solar, wind, geothermal) were equal to 30% of such expenditures without limit.
Beginning January 1, 2011, Congress substantially reduced the amounts of such credits. This post will discuss two home energy efficiency tax credits:
- Credit for Nonbusiness Energy Property
- Credit for Residential Energy Efficient Property
Credit for Nonbusiness Energy Property
This credit equals the sum of:
- 10% of certain costs for property installed to improve the energy efficiency of existing homes (these costs are referred to as building envelope components)
- 100% of costs for residential energy property expenses (subject to dollar limitations for each specific type of property)
Building envelope components (10% credit) include:
- exterior windows (including skylights)
- exterior doors
- certain metal and asphalt roofs designed to reduce heat gain
It is important to note that these credits only apply when such property is installed in your principal residence.
For building envelope components, the credit is allowed only for amounts paid to purchase the components (i.e., the credit is NOT allowed for onsite preparation, assembly, or original installation).
Residential energy property (100% credit) includes:
- electric heat pump water heaters (up to $300)
- electric heat pumps (up to $300)
- biomass fuel stoves (up to $300)
- high-efficiency central air conditioners (up to $300)
- natural gas, propane, or oil water heaters (up to $300)
- natural gas, propane, or oil furnaces or hot water boilers (up to $150)
- advanced main air circulating fans (used in natural gas, propane, or oil furnace) (up to $50)
The credit for qualified energy property is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.
In prior years, the credit was not subject to the $50 to $300 limits. The credit was equal to 30% of the expenses up to a $1,500 credit.
In 2011, there is a lifetime maximum nonbusiness energy property credit of $500 ($200 for exterior windows and skylights), taking into account all such credits allowed to the taxpayer for years ending after December 31, 2005. This limit includes credits for building envelope components and for residential energy property.
Credit for Residential Energy Efficient Property
Clear your mind of the above rules. This is a completely separate credit.
This credit is equal to 30% (without limit) of the cost of qualified:
- solar electric property
- solar water heating property
- fuel cell property
- small wind energy property
- geothermal heat pump property
The rule for this credit has not changed from prior years—the credit is still equal to 30% of the costs of such property without limit. This credit is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.
This credit applies when the property is installed in your residence (the statute does not require it to be your principal residence). It is therefore possible that you can claim a credit for this credit on a vacation home (although it would be best to wait for IRS guidance on the issue).
Both the credit for nonbusiness energy property and credit for residential energy efficient property are nonrefundable credits that can be used to offset both regular tax and alternative minimum tax.
One final note—taxpayers may rely on written manufacturer certifications that the property is qualified for these credits.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.