Tax Credits for Residential Energy Efficiency Improvements

By Daniel Gayer, Tax Manager
October 2013

With the rising cost of energy over the last decade, particularly the cost of home heating oil used to heat so many homes in New England, many homeowners have considered and perhaps taken steps to make their homes more energy efficient.  Some are no doubt aware that the federal government provides several tax credits to incentivize such energy efficiency improvements, but few understand the details of these credits and which credits apply to what expenditures.  For residential homeowners, two federal credits with very similar names but different rules are currently available to reduce your 2013 tax liability: the Residential Energy Property Credit and the Residential Energy Efficient Property Credit.

Residential Energy Property Credit

The Residential Energy Property Credit is currently available through the end of 2013 and allows taxpayers who make certain efficiency improvements to obtain a credit equal to 10% of the amount they spent on the improvements, limited to a lifetime maximum credit of $500.  Costs eligible for this credit include the price of materials and installation costs for:

  • insulation materials
  • exterior windows, including skylights
  • exterior doors
  • metal roofs with special pigmented coatings and certain asphalt roofs
  • electric heat pump water heaters
  • electric heat pumps
  • central air conditioners
  • natural gas, propane, or oil water heaters or furnaces
  • hot water boilers
  • stoves using renewable plant-derived fuel
  • advanced main air circulating fans

The credit may be allowed for do-it-yourself installations if the homeowner maintains sufficient documentation, but in most cases a qualified contractor is the best choice and should be able to provide sufficient documentation to obtain the credit.  This credit is not available for new construction; it is applicable only to alterations made to existing homes.  Also, it applies only to homes serving as primary residences.

Residential Energy Efficient Property Credit

The Residential Energy Efficient Property Credit is a more limited but potentially larger credit that is currently available through 2016 and provides a credit equal to 30% of the cost of:

  • solar water heaters
  • solar electricity equipment
  • fuel cell plants
  • small wind turbines
  • geothermal heat pumps

This credit is unlimited in most cases with the exception of fuel cell plants, for which the credit is limited to $500 per half-kilowatt capacity of the plant.  Expenses related to hot tubs and swimming pools are not eligible, nor are costs covered by any special subsidized financing obtained for energy efficiency improvements.  If you are considering a major investment and are concerned that you may not have enough of a federal tax liability in 2013 to make full use of the credit, know that any unused credit may be carried forward into future years.  The only long term cost of using this credit is that the homeowner must reduce their basis in the residence by the amount of the credit used.  This credit is available for both new construction and existing homes, and applies to both principal residences and second homes.

Conclusion

If you have recently made or are considering making an investment to improve the energy efficiency of your home, please contact your BNN tax professional for more information and to ensure that you obtain the proper documentation to qualify for one of these credits.  If you are a business owner considering a similar investment in your business property, please contact us as well because there are several other business-specific credits that you may be able to utilize.  Some of those will be addressed in a subsequent article.

If you have any questions, please contact your BNN tax advisor at 1-800-244-7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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