What you need to know about the Federal Energy Tax Credit

One of the most-commonly claimed tax credits on an individual tax return is the Federal Energy Tax Credit.  The credit is designed to give you a tax break if you make energy-efficient improvements to your home.  Unfortunately, there are a lot of rules that you must understand before you take the credit – here are the basics of what you need to know:

There are 2 main energy credits:

The first:  A credit for installing solar water heating equipment, fuel cell equipment, wind energy equipment, or geothermal equipment.  Of these, the most-commonly claimed is the credit for installing geothermal equipment.  In this case the tax credit is 30% of the cost of the entire geothermal system including labor.  Thus, if you spent $15,000 on a geothermal system in 2013, your credit would be $4,500, meaning that you would pay $4,500 less in Federal tax in 2013.  You can take this credit for systems that you install in either a newly-constructed home or in an existing home.  There is no lifetime cap on this type of credit.

The second:  A credit for 10% of the cost of energy-efficient improvements made to your home.  Those improvements could be caulking, new qualifying windows, weather-stripping, adding insulation, new qualifying exterior doors, new qualifying storm-doors, new qualifying heat pump or air conditioning system, new qualifying hot water heaters, etc.  You will notice that I used “qualifying” often.  To determine if your energy savings improvements are qualified, you would need to obtain a certificate from the manufacturer of the item stating as much.  If you didn’t get a certificate from the manufacturer of the item, then you might go to websites such as energystar.gov to get an idea as to if your improvement is qualified.  Keep in mind that the cost of labor may or may not be included in figuring the credit, depending on what particular improvement you make to your home.  In addition, there are caps on some of the credits (such as a $150 max credit for a natural gas furnace, a $300 max credit for a natural gas water heater, amongst other caps).  Also, the maximum combined credit that you can take on all of your tax returns from 2006-2013 can not exceed $500.  This type of credit can only be used on existing homes and not on newly-constructed homes.

If you can not determine whether or not your improvements qualify for the credit, then give us a call – we have resources to help you determine if you are eligible for the credit.