As the year is winding down, you may be considering some ways to lesson your 2009 tax burden. Should you take advantage of the federal tax credits Congress has provided certain energy efficiency expenditures? Well, maybe. This post is intended to help you understand these tax credits of energy expenditures and decide if they are for you.

Photo via marchetti via Flickr

First, an overview of credits available through The American Recovery and Reinvestment Tax Act of 2009:

Existing Homes Only

• Tax credits of 30% of your cost (up to $1,500) are available for 2009 and 2010 for existing homes only.
• You can claim these credits either tax year, but the total cannot exceed $1,500.
• These credits are for certain windows, doors, insulation, roofs, HVAC systems, water heaters and biomass stoves.
• Installation is not included for windows, doors, insulation and roofs; it is generally included with other qualifying improvements.
• The credits are for products of highest efficiency levels and must be certified by the manufacturer in writing that they meet the required standards.
• Qualifying products must be placed in service after December 31, 2008 and before January 1, 2011.
• The improvements must be made to the taxpayer’s principle residence located in the United States.
• In order to claim the credit, you need to attach Form 5695, Residential Energy Credits, to either the 2009 or 2010 tax return. You must claim the credit for the year the improvement was made.
• Don’t also forget about the First Time Homebuyer’s Credit that was expanded.

Existing Homes or New Construction

• Tax credits of 30% of the cost, with no upper limit, are also available through 2016 for existing homes or new construction.
• These credits cover certain geothermal heat pumps, solar panels, solar water heaters, small wind energy systems and fuel cells.

Plug-In Electric Cars

• Credits of between $2,500 and $7,500 are available for qualified plug-in electric vehicles, depending on the battery capacity.
• The full amount of this credit will be reduced with respect to a manufacturer’s vehicles after the manufacturer has sold 200,000 vehicles. The credit will then phase out over a year.

How to Maximize Your Tax Credit Without Overspending

If your house needs energy efficient improvements and you are financially able to pay for these improvements, you may assume that these tax credit purchases are a no-brainer. Not so fast.

I discovered an interesting note on the Environmental Protection Agency web site:

“These tax credits are available for a number of products at the highest efficiency levels, which typically cost much more than standard products.”

Hmmm. Did you get that part about much more? The question you must answer is “Should I spend whatever the much more amount is in order to get the products which will qualify for the tax credit?”

Here is how to approach it: compare the costs of the products that qualify for the tax credit with similarly efficient products that don’t. If the qualifying products don’t cost over 30% more than the non-qualifying ones, then spend up to $5,000 on those that qualify and take your tax credit. Why $5,000? Because most credits max out at $1,500, which is 30% of $5,000. Things get a bit more dicey when you have to pay over 30% extra in order to get that credit or when you are spending more than $5,000 total. I would forgo the tax credit, for example, if I had to pay twice as much for a product that is only marginally more efficient.

If you are considering a water heater or HVAC system, compare the estimated annual usage expenditures to learn what each option should cost to operate, then divide the annual energy cost savings into the extra you pay for the more efficient system to learn how many years of energy savings it will take to recoup that additional upfront cost of the more efficient unit. This nifty calculator will make it a breeze. For example, if the qualifying HVAC costs $8,000 and saves $400 annually over a less efficient system that costs $6,000, you would recoup your upfront cost in five years ($8,000 minus $6,000 = $2,000 extra upfront. $2,000 divided by annual savings of $400 = five years). If you use all your tax credit for this HVAC, you could subtract the credit of $1,500 from the $8,000 cost for an “after tax” cost of $6,500, allowing you to recoup the extra (now only $500) in a little over one year. Obviously, this is something you should do.

Summary Strategies

• Any spending over $5,000 for any combination of windows, doors, insulation or HVAC does not qualify for a tax credit. You should therefore consider spending only $5,000 toward qualifying materials and use more discernment on all purchases over $5,000.
• You cannot claim a $1,500 credit for 2009 and then try it again in 2010. Your total is $1,500 for both years, so if you max out the $1,500 in 2009 you are disqualified for any credit in 2010.
• If you have the available funds, making your home more energy efficient is a good thing. Check into buying the products which qualify for the tax credit, but be wary of overpaying just to get the credit.

Relevant Articles You May Like

• How the First Time Home Buyer Credit Can Create Economic Growth
• Why The First Time Home Buyer Credit Is Terrible For The Economy
• 2007 Tax Year Returns Are Done!

This post was written by Joe Plemon

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