As part of the American Recovery and Reinvestment Act passed in 2009 by Congress, a tax credit was authorized to help people improve the energy efficiency of their homes and buildings through winterizing. This credit is available and to be taken in the 2010 tax year.
There were two specific credits included in the Recovery Act associated with winterizing. The first is the residential energy efficient property credit. This is the tax credit that most individuals and homeowners can use to reduce person tax liability for the 2010 tax year. The second credit, the non-business energy property credit, is available for non-profit organizations and similar functions to gain the same credit benefit given to homeowners.
The non-business energy property credit provides a tax credit up to 30 percent of the total cost up to a maximum of $1,500. The total can be the combined charge of costs in 2009 and 2010 to do the work. That said, the devil is in the details with regards to what changes are allowed to be claimed. Changes such as improved heating and air conditioning system replacements, biomass stoves, and swapping out old water heaters with new ones are eligible, including the labor cost of the work to make the change happen. Winterizing of windows, some roof changes, and doors are also fair game. However, in some cases the labor is not allowed to be claimed.
For the taxpayer the best approach is to research if a winterizing change is eligible before making the purchase or contracting the work. Do not rely on the vendor to confirm this for you as many are using the credit as a marketing point to gain business, but many times the work advertised may not be fully eligible or allowed to be claimed. If the taxpayer is not careful, he or she could pay for work out of pocket to only find out later it can’t be claimed.
The credit is claimed when the taxpayer files his or her annual income taxes. The credit will be provided as an option to claim on the tax forms from the IRS. Documentation will be expected to be available from the taxpayer to prove the claim should there be an audit or data review. The details for the claim should be filled out on IRS Form 5695, Residential Energy Credits.
The residential energy efficient property credit is available for those who want to make their home more environmentally friendly. This “green” approach is a different category than winterizing a home. This credit was intended to generate domestic business for new industries pushing specific types of energy-producing equipment. The credit amount is similar to the non-business energy property credit in that it will cover 30 percent of costs for qualifying equipment. Typical equipment included can be solar electricity systems, sun heated water heaters, geothermal systems, wind-driven machines, and even some fuel cell/battery equipment. Many times the labor costs are included in eligible costs as well.
Keep in mind, similar to the non-business energy property credit, the residential energy efficient property credit should be researched before being relied on with a purchase. Vendors are using both credits to market their services without guarantees that the entire work and product offered is eligible. The buyer is on the hook for the cost if it turns out the particular product or services turns out to be non-eligible to claim. It is good to note that both of the above benefits are tax credits rather than tax deductions. A tax deduction reduces the amount of money earned that will be taxed. So if you earn $50,000 and can deduct $5,000 you will be taxed on the remaining $4,500. A tax credit is applied after deductions are counted. So with the same example you earn $50,000 and get a standard deduction of $7,500, then you will be taxed on the $42,500 remaining. If for argument your taxes owed then are $1,000, and you have a tax credit of $1,500, you will get back $500 in your pocket rather than owing money.