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Federal Tax Credits for Energy Efficiency

On October 3, 2008, President Bush signed into law the “Emergency Economic Stabilization Act of 2008.” This bill extended tax credits for energy efficient home improvements (windows, doors, roofs, insulation, HVAC, and non-solar water heaters). Tax credits for these residential products, which had expired at the end of 2007, will now be available for improvements made during 2009. However, improvements made during 2008 are not eligible for a tax credit.

The bill also extended tax credits for solar energy systems and fuel cells to 2016. New tax credits were established for small wind energy systems and plug-in hybrid electric vehicles. Tax credits for builders of new energy efficient homes and tax deductions for owners and designers of energy efficient commercial buildings were also extended.

Federal Tax Credits for Energy Efficiency includes:

**Please note, not all ENERGY STAR qualified homes and products qualify for a tax credit. These tax credits are available for a number of products at the highest efficiency levels, which typically cost much more than standard products. If, for whatever reason, you decide not to purchase a product covered by the tax credit, you may still consider purchasing an ENERGY STAR product. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit.

Tax Credits for Consumers:

Home Improvements

Home improvement tax credits are available for home improvements “placed in service” from January 1, 2009 through December 31, 2009. Any qualified home improvements made in 2008 are not eligible for the tax credit.

Home improvement tax credits are available for insulation, replacement windows, non-solar water heaters, and certain high efficiency heating and cooling equipment. See chart. The maximum amount that a taxplayer may claim from all of these tax credits combined is $500 over the lifetime of the tax credit (2006, 2007 & 2009).

If you are building a new home, you do not qualify for the tax credits for “eligible building envelope components” (windows, doors, insulation, roofs) or “qualified energy property” (HVAC & non-solar water heaters). However, the tax credit for photovoltaics, solar water heaters, small wind systems and fuel cells is available for homeowners building new homes. More.

The Internal Revenue Service (IRS) guidance for consumers: IRS Notice 2006-26 PDF Exit ENERGY STAR.

Efficient Cars

Starting January 1, 2009, there is a new tax credit for Plug-in hybrid electric vehicles, starting at $2,500 and capped at $7,500 for cars and trucks (the credit is based on the capacity of the battery system). The first 250,000 vehicles sold get the full tax credit (then it phases out like the hybrid vehicle tax credits).

Tax credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles. The tax credit amount is based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models. These credits are available for vehicles placed in service starting January 1, 2006. For hybrid and diesel vehicles made by each manufacturer, the credit will be phased out over 15 months starting after that manufacturer has sold 60,000 eligible vehicles. For vehicles made by manufacturers that have not reached the end of the phase-out, the credits will end for vehicles placed in service after December 31, 2010. See the IRS Website for updated information Exit ENERGY STAR.

Solar Energy Systems

Tax credits are available for qualified solar water heating and photovoltaic systems. The credits are available for systems “placed in service” from January 1, 2006 through December 31, 2016. The tax credit is for 30% of the cost of the system, up to $2,000. After December 31, 2008, this $2,000 cap will be removed for photovoltaic systems (but not solar water heaters). This credit is completely separate from the $500 home improvement credit.

Small Wind Energy Systems

Tax credits are available to homeowners who install residential small wind turbine systems. The credits are available for systems placed in service from January 1, 2008 to December 31, 2016. The tax credit is for 30% of the cost of the system, up to $500 for each half kilowatt of capacity with an overall maximum of $4,000.

Fuel Cells

There is a consumer tax credit of up to 30% of the cost (up to $1,500 per 0.5 kW of capacity maximum) for installing a “qualified” fuel cell and microturbine systems. The credits are available for systems “placed in service” from January 1, 2006 through December 31, 2016. This credit is not limited to the $500 home improvement cap.

SUMMARY OF TAX CREDITS FOR HOMEOWNERS

Product Category Product Type Tax Credit Specification Tax Credit Notes
Windows & Doors Exterior Windows and Skylights ENERGY STAR qualified OR meets IECC1 10% of cost, up to $2002 for all windows, skylights and storm windows

All ENERGY STAR labeled windows and skylights qualify for tax credit.Learn more about ENERGY STAR qualified windows and skylights.

  • Installation costs are not included.
  • For tax purposes, save your receipt and either the ENERGY STAR label from all your new windows OR the Manufacturer's Certification Statement.
  • Use IRS Form 5695 PDF Exit ENERGY STAR
  • Must be “placed into service” between Jan. 1–Dec. 31, 2009.
Storm Windows Meets IECC1 in combination with the exterior window over which it is installed, for the applicable climate zone 10% of cost, up to $2002 for all windows, skylights and storm windows

Manufacturer Certification Statement3 will list classes of exterior window (single pane, clear glass, double pane, low-E coating, etc.)4 that a product may be combined with to be eligible in specific climate zones.

Exterior Doors Meets IECC1 10% of cost, up to $5002

ENERGY STAR doors will almost always qualify, except for certain parts of California4. Learn more about ENERGY STAR qualified doors.

Storm Doors In combination with a wood door assigned a default U-factor by the IECC1, and does not exceed the default U-factor requirement assigned to such combination by the IECC 10% of cost, up to $5002

Eligibility will be confirmed by manufacturer and documented in the Manufacturer Certification Statement3

Roofing Metal Roofs,
Asphalt Roofs
ENERGY STAR qualified 10% of cost, up to $5002

All ENERGY STAR labeled metal roofs qualify for the tax credit.

Insulation Insulation Meets 2000 IECC & Amendments 10% of cost, up to $5002
  • For insulation to qualify, its primary purpose must be to insulate. (example: vapor retarders are covered, siding does not qualify).
  • Must be expected to last 5 years OR have a 2 year warranty
  • Installation costs are not included.
  • Manufacturer's Certification Statement3 required.
  • For tax purposes, save your receipt and the Manufacturer's Certification Statement.
  • Use IRS Form 5695 PDF Exit ENERGY STAR
  • Must be “placed into service” between Jan. 1–Dec. 31, 2009.
HVAC Central A/C Split Systems:
EER >=12.5
SEER >= 15

Package systems:
EER >= 12
SEER >= 14
$3002

For a list of qualified products, go to the Consortium for Energy Efficiency product directory Exit ENERGY STAR, click on the Air Conditioners and in the “CEE Tier” enter “Residential Tier 2.”

Note — not all ENERGY STAR products will qualify for the tax credit.

ENERGY STAR specification:
Split Systems: EER >= 11.5 & SEER >= 14
Package systems: EER >= 11 & SEER >= 14

Air Source Heat Pumps HSPF >= 9
EER >= 13
SEER >= 15
$300²

Note — not all ENERGY STAR products will qualify for the tax credit.

ENERGY STAR specification:
Split systems: HSPF >= 8.2 & EER >= 11.5 & SEER >= 14
Package systems: HSPF >= 8 & EER >= 11 & SEER >= 14

Geo-Thermal Heat Pump

Same criteria as ENERGY STAR:

Closed Loop:
EER >= 14.1
COP >= 3.3

Open Loop:
EER >= 16.2
COP >= 3.6

Direct Expansion:
EER >= 15
COP >= 3.5

30% of the cost, up to $2,000.

All ENERGY STAR labeled geo-thermal heat pumps qualify for the tax credit.

Gas, Oil, Propane Furnace or Hot Water Boiler

Furnaces:
AFUE >= 95

Boiler:
AFUE >= 95

$1502

For a list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR

Note — not all ENERGY STAR products will qualify for the tax credit.

ENERGY STAR specification:
Furances: AFUE >= 90
Boilers: AFUE >= 85

Advanced Main Air Circulating Fan No more than 2% of furnace total energy use $502

For a partial list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR

Water Heaters Gas, Oil, Propane Water Heater Energy Factor >= 0.80
or a thermal efficiency of at least 90%.
$3002

Note: ENERGY STAR qualified high-efficiency gas storage water heaters will not qualify for the tax credit. All ENERGY STAR qualified whole-home gas tankless and gas condensing models will qualify.

ENERGY STAR criteria:

Whole-Home Tankless: Energy Factor >= 0.82
Gas Condensing: Energy Factor >= 0.8

For a partial list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR.

Electric Heat Pump Water Heater Energy Factor >= 2.0 $3002

This is more than twice as efficient as the current federal standard.

Biomass Stove Biomass Stove

Stove which burns biomass fuel5 to heat a home or heat water.

Thermal efficiency rating of at least 75%.

$300
Cars Hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles Based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models

There is a 60,000 vehicle limit per manufacturer before a phase-out period begins. Toyota and Honda have already been phased out. Credit is still available for Ford, GM and Nissan.

For more information visit: Fueleconomy.gov Exit ENERGY STAR

  • Use IRS Form 8910 PDF Exit ENERGY STAR for hybrid vehicles purchased for personal use.
  • Use IRS Form 3800 PDF Exit ENERGY STAR for hybrid vehicles purchased for business purposes.
Plug-in hybrid electric vehicles $2,500–$7,500

The first 250,000 vehicles sold get the full tax credit (then it phases out like the hybrid vehicle tax credits).

Effective January 1, 2009.

Solar Energy Systems Solar Water Heating
  • At least half of the energy generated by the “qualifying property” must come from the sun. Homeowners may only claim spending on the solar water heating system property, not the entire water heating system of the household.
  • The credit is not available for expenses for swimming pools or hot tubs.
  • The water must be used in the dwelling.
  • The system must be certified by the Solar Rating and Certification Corporation (SRCC).
30% of cost, up to $2,000
Photovoltaic Systems Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement. 30% of cost, up to $2,000. After January 1, 2009 the $2,000 cap no longer applies.
Small Wind Energy Systems Small Wind Energy Systems   30% of the cost, up to $500 per half kW of capacity (not to exceed $4,000)  
Fuel Cells Fuel Cells Efficiency of at least 30% and must have a capacity of at least 0.5 kW. 30% of the cost, up to $1500 per half kW of power capacity

1Either the 2001 Supplement of the 2000 International Energy Conservation Code or the 2004 Supplement of the 2003 International Energy Conservation Code.

2Subject to a $500 maximum per homeowner for all improvements combined.

3A Manufacturer’s Certification is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. The IRS encourages manufacturers to provide these Certifications on their website to facilitate identification of qualified products. Taxpayers must keep a copy of the certification statement for their records, but do not have to submit a copy with their tax return.

4Additional information on exterior window features may be viewed at Anatomy of an Energy Efficient Window.

5Biomass Fuel means any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers.

The IRS defines “placed in service” as when the property is ready and available for use.

Tax Credits for Home Builders:

Eligible contractors need to fill out IRS Form 8908 PDF Exit ENERGY STAR to get the tax credit. The IRS has provided the following guidance regarding the tax credits for constructing energy efficient new homes available under the Energy Policy Act of 2005:

  • IRS Notice 2006–27 PDF Exit ENERGY STAR provides guidance for the credit for building energy efficient homes other than manufactured homes.
  • IRS Notice 2006–28 PDF Exit ENERGY STAR provides guidance for the credit for building energy efficient manufactured homes.

Home builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50% energy savings for heating and cooling over the 2004 International Energy Conservation Code (IECC) and supplements. At least 1/5 of the energy savings must come from building envelope improvements. This credit also applies to contractors of manufactured homes conforming to Federal Manufactured Home Construction and Safety Standards.

There is also a $1,000 tax credit to the producer of a new manufactured home achieving 30% energy savings for heating and cooling over the 2004 IECC and supplements (at least 1/3 of the savings must come from building envelope improvements), or a manufactured home meeting the requirements established by EPA under the ENERGY STAR program.

Please note that, with the exception of the tax credit for an ENERGY STAR qualified manufactured home, these tax credits are not directly linked to ENERGY STAR. Therefore, a builder of an ENERGY STAR qualified home may be eligible for a tax credit but it is not guaranteed.

These tax credits apply to new homes located in the United States whose construction is substantially completed after August 8, 2005 and that are acquired from the eligible contractor for use as a residence from January 1, 2006 through December 31, 2009.

Tax Deductions for Commercial Buildings:

A tax deduction of up to $1.80 per square foot is available to owners or designers of new or existing commercial buildings that save at least 50% of the heating and cooling energy of a building that meets ASHRAE Standard 90.1-2001. Partial deductions of up to $.60 per square foot can be taken for measures affecting any one of three building systems: the building envelope, lighting, or heating and cooling systems. These tax deductions are available for systems “placed in service” from January 1, 2006 through December 31, 2013.

Take the ENERGY STAR Challenge to find the best opportunities for energy savings, set goals for improvement, and achieve superior energy efficiency.

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