Energy Tax Credits

Revised: 9/6/2010.

Homeowners may qualify for a federal tax credit for making improvements or installing appliances design to boost the energy-efficiency of a home.

Basic Requirements:

You purchase and install qualifying energy-efficient property in your main home in the years 2006, 2007, 2009, or 2010. You must purchase new energy-efficient equipment, and the equipment must be expected to remain installed for at least five years.

Examples of home improvements that could qualify as tax credits:

• exterior doors and windows,
• storm windows,
• skylights,
• metal roofs,
• insulation,
• central air conditioning and heating,
• geothermal heat pumps,
• hot water boilers,
• advanced main air circulating fans,
• biomass fuel stoves with a thermal efficiency rating of 75% or more, and
• asphalt roofs with cooling granules.

You can find a nice list of qualifying home improvement equipment from the EnergyStar web site.

Home Improvements (aka Nonbusiness Energy Property Credit)

You can receive a tax credit of 30% of the purchase price of qualified energy-efficient products, up to a maximum tax credit of $1,500. According the the IRS, "To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer's main home in the United States." The $1,500 maximum applies to to the total amount of credits claimed for the years 2009 and 2010 combined. That means your tax credits for energy-efficient improvements cannot exceed a total of $1,500 over both 2009 and 2010.

Improvements Restricted to 'Main Home'
The tax credit for nonbusiness energy property is restricted to improvements to and appliances installed at a primary residence. Improvements made on rental homes, second homes, or vacation property are not eligible for this tax credit.

Solar Panels, Fuel Cell Power Plants, Geothermal and Wind (aka Residential Energy Efficient Property Credit)

The following types of equipment are eligible for a 30% tax credit with no maximum tax credit amount and are available through December 31, 2016.

• Solar panels,
• Solar-powered water heaters,
• Geothermal heat pumps,
• Photovoltaic systems,
• Small wind energy systems, and
• Fuel cells.

You can install "solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity –only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity." The tax credit amount is 30% of the cost, with no maximum on the total tax credit amount. This tax credit is available through the end of 2016.

Energy Tax Credits Reduce Your Cost Basis

You must reduce the cost basis of your main home by the dollar amount you claim for the residential energy tax credits. The IRS explains in Publication 553: "You must reduce the basis of your home by the amount of credit allowed." The basic formula for determining the cost basis of your home is provided in Selling Your Home.

Energy Credits Tax Forms and Instructions

IRS Form 5695 (PDF, 5 pages including instructions)
Summary of Tax Incentives from the Energy Star Web site