Two Energy Credits To Trim 2010 Taxes

Two energy tax credits hold appeal both for true green diehards and those who are staying put due to housing market doldrums.
By: LAURA SAUNDERS: wsj.com
Still smarting from your 2009 taxes, due in a few days? Start whittling the bill for next April.

A good place to begin: two federal tax credits for homeowners who want to save energy, one of which expires at the end of this year. The credits have appeal both for true green diehards and those who are staying put due to housing market doldrums.

The credits took effect in their current form in February 2009. Both offer dollar-for-dollar write-offs against taxes, not just a deduction from income. And unlike many tax benefits, there are no income limits on who can use them.

Yet experts say many people are still unaware they exist. Bill Shaw, a remodeler in Houston, says his best marketing has been done by—of all people—tax preparers. "Since January, my phone has been ringing off the hook with people whose accountants told them" about the credits, he says.

The smaller benefit, known as the Residential Energy Property Credit, will appeal to a broader swath of taxpayers. It applies to 30% of the cost of retrofitting an existing home to save energy, up to $1,500. That means you have to spend $5,000 to receive the maximum credit. This benefit expires at the end of 2010, and amounts claimed in 2009 count toward the $5,000 total.

Items that qualify include insulation, windows, doors, roofing, hot water heaters and air-conditioning systems. Not included: ceiling fans or window air-conditioning units. Installation costs are permitted for some items but not others (see chart below). The Internal Revenue Service recently said that qualified items installed in an addition to an existing house also are eligible.

The other credit, known as the Residential Energy Efficiency Property Credit, is far more generous but typically requires greater expense and commitment to green living. It is for 30% of the total cost of items such as solar panels, windmills and geothermal heat pumps, and the credit amount is unlimited. It expires at the end of 2016.

Jeremy Skogquist, an executive with NIH Homes in the Minneapolis area, says he has sold more than a dozen $25,000 packages in the past year tied to this credit. The package offers a geothermal system to store water for heating and cooling deep in the ground where the temperature is a constant 52 degrees. "The tax credit cuts my clients' payback time to about four to five years from six to eight at current rates," he says.

Far to the south, Houston architect Kathleen English is using both credits to save nearly $15,000 on the cost of a "green" house she is rehabbing for her family. In addition to a geothermal system, it will have solar panels, special insulation, a reflective roof and energy-efficient windows. She is springing for solar panels now, hoping that her local utility at some point will pay homeowners to feed excess power back into the grid.

If you want to use either credit, do your research. The specifications for what is eligible are precise and stringent. For example, some Energy Star-rated items qualify for the credit while others don't. Taxpayers claim either credit on Form 5695, and for your records you should keep the manufacturer's certification that the component is eligible. (Many contractors, like Bill Shaw, will help with the paperwork.)

Those planning to upgrade windows may want to wait a bit, because a pending bill expected to pass Congress in the next few months would expand the law to include all Energy Star windows, whereas only some are currently allowed. The provision should take effect 90 days after enactment.

Comprehensive information about eligibility is available on the National Association of Home Builders Web site and from the IRS. Retailers like Home Depot and Lowe's also provide useful guides. For a listing of separate state and local energy tax incentives, see www.dsireusa.org.