Energy Conservation Moves that Could Save You Money at Tax Time

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January 2006

With the big spike in gas prices in the autumn and higher winter heating costs predicted for the rest of this winter, consumers everywhere are looking for ways to save on energy costs. In past reviews, I've offered you tips for saving on fuel costs. Now thanks to some old and new tax incentives, you may also be able to benefit from specific tax deductions or credits for purchasing "clean-fuel" vehicles or taking certain energy conservation measures at home.

Current "clean fuel" tax deductions apply to specific vehicles bought before December 31, 2005. If you've recently bought one, you may be able to save on 2005's taxes. Then last summer Congress passed the 2005 Energy Policy Act (EPAct 2005) that contains tax credits starting January 1, 2006, related to vehicle purchases and energy-conserving home improvements. Currently, some states also provide certain tax deductions or credits for specific residential energy conversation devices and improvements. This review gives you a brief overview of potential tax savings related to energy conservation moves and where to find more complete information.

Tax Incentives for New "Clean Fuel" Vehicle Purchases

If you are thinking about purchasing a new hybrid vehicle, such as a Honda Civic Hybrid, Ford Escape Hybrid, or Toyota Prius, when you purchase the vehicle could have different tax benefit consequences. So check out your options below. Other clean fuel vehicles, such as vehicles powered by electricity or natural gas also qualify for tax benefits.

Bought before December 31, 2005

• A one-time federal income tax deduction of up to $2,000 may be taken for specific hybrid electric vehicles and alternative fuel vehicles which were bought new and placed in service before December 31, 2005. Read more about which vehicles qualify and how to take the deduction from www.fueleconomy.gov from the U.S. Department of energy. You can, by the way, take the deduction whether or not you itemize deductions on your income tax return.
  
  • Tax Incentives for New Hybrid Vehicles
  • Tax Incentives for Electric and Clean-Fuel Vehicles
• A one-time federal income tax credit of 10% of the vehicle cost up to $4000 may be taken for all electric vehicles which meet the tax-code qualifications. This credit is continued under EPAct 2005.
• Some states also provide some tax incentives for alternative fuel vehicles. The Department of Energy provides a guide that may help you find out more about these incentives.

Buying after January 1, 2006

In general, the Energy Policy Act of 2005 has replaced tax deductions for clean-fuel vehicles with a new variety of tax credits.

• A one-time federal income tax credit may be taken for the purchase for personal use of certain hybrid and alternative fuel vehicles. The amount of credit varies based on the type of fuel, the fuel economy and the weight class of the vehicle. The range for hybrid vehicles goes from $650 to $3400. Electric and certain other alternative fuel vehicles can qualify for up to $4000 tax credit. And should you be one of the infinitesimally small number of Americans who get a "fuel cell" vehicle, such as a hydrogen-cell vehicle, the maximum credit could be $12,000.
• The Department of Energy's website at www.fueleconomy.gov plans to have more specific details available about these credits as they become available.

Tax Incentives for Improving Energy Conservation at Home

EPAct 2005 contains provisions that allow home owners to claim tax credits up to a maximum of $500 total for making certain energy efficient improvements to their homes. There are some qualifiers: You have to make the improvements to your primary residence and it must be in the U.S.—it can't be a second (vacation) home or rental property. You must make the improvements in 2006 and 2007. You can select a number of improvements from various categories but some credits per item are limited and the total credit you can receive is $500.

• Energy efficient property improvements that qualify for a credit of 10% of cost include:
  
  • Energy efficient exterior doors
  • Energy efficient exterior windows and skylights (credit limit of $200)
  • Insulation designed to reduce heat loss or gain
  • Metal roofs that are coated with heat-reducing coating
• Energy efficient devices or appliances that qualify for a credit of 100% of cost up to set limits
  
  • Highly energy-efficient central air conditioning units, electric heat pumps and heat pump water heaters, and geothermal heat pumps (credit limit of $300)
  • Qualified energy efficient furnaces fueled by natural gas, propane and oil and certain hot-water boilers (credit limit of $150)
  • Advanced main air circulating fans (credit limit of $50)

How do you tell just which products will qualify for these improvements? The final rulings will be made by the IRS and Department of the Treasury. Manufacturers should provide information on their products and you can check out the government website, www.energystar.gov, they plan to post more information as it becomes available.

The bill also provides for separate tax credits for certain solar or electricity generating residential energy equipment. You can claim a tax credit equal to 30% of the cost (up to the limits) of installing these devices in your primary residence (but not if you're using it to heat a pool or hot tub).

• Solar water-heating equipment (credit limit of $2,000)
• Solar photo-voltaic electricity generating equipment (credit limit of $2,000)
• Other fuel-cell equipment that generates electricity (credit limit of $500 per 0.5 kilowatt)

Many states also provide various tax incentives for energy-conservation home improvements. The Database of State Incentives for Renewable Energy provides links to a number of individual state resources.

Depending on your energy conservation needs, some of these tax incentives may help you save on taxes in the short-term while you benefit with energy savings long-term.

Prepared for Corning Credit Union by Remar Sutton & Associates, January 2006. Reviewed and updated March 2007. All rights reserved.