Residential Energy Property Tax Credit

The Energy Tax Incentives Tax Act of 2005 provides a new Residential Energy Property Tax Credit of up to $500 to individual taxpayers for nonbusiness energy property installed on the individual's principal residence located in the United States during 2006 and 2007. Eligible improvements include: insulation; exterior windows and skylights(this includes new locations and replacements); exterior doors (including insulated garage doors); metal roofs with special pigmented coatings; electric heat pump water heaters; electric and geothermal heat pumps; central air conditioners; natural gas, propane, or oil water heaters or furnaces; hot water boilers; and advanced main air circulating fans. Outdoor caulking and weather-stripping appear to qualify id done according to IECC code and will likely last at least 5 years or more. Set-back thermostats and ceiling fans do not qualify for this credit. The credit is limited to $500 for the lifetime of the taxpayer. The credit is equal to 10% of the qualified energy efficiency improvements plus the cost of qualified energy property (heat pumps, water heaters, furnaces, and central air conditioners) subject to the following limits:

1. $200 for windows,

2. $ 50 for an advanced main air circulating fan,

3. $150 for any qualifying natural gas, propane, or oil furnace or hot water boiler, and

4. $ 300 for any item of energy-efficient building property.

Qualified energy efficiency improvements is a building envelope component such as: any insulation or system specifically designed to reduce heat loss or heat gain when installed in or on a dwelling unit; exterior windows or skylights; exterior doors; any metal roof only if it has appropriate pigmented coatings specifically designed to reduce the heat gain of the dwelling unit. The 2000 IECC (International Energy Conservation Code) prescribes the R-values for the insulation and specifications for heating & cooling systems. The Energy Star Program prescribes the requirements for metal roofs with heat-reduction pigmentation. Not all insulation material is eligible for the credit, only insulation of the building envelope qualifies. Therefore, lined or insulated drapes would not qualify.

The credit is for an eligible dwelling unit. A owner of a single family home, used as his principal residence, will qualify for the credit for improvements to his property. Improvement to two or more dwelling units are more complex. The tenant-stockholder of a cooperative housing corporation or the condominium owner is treated as having paid a proportionate share of the cost of any qualified energy efficiency improvements done by the corporation or association. In the case of joint owners of a qualifying dwelling unit owned and used as a principal residence. The total credit cannot exceed $500 by all of the owners combined. The credit is to be claimed by each owner is the percentage each owner paid for the energy improvements.

Vacation home and rental units do not qualify for this credit.

The credit is only available for energy improvements placed in service during 2006 and 2007. The expenditure is considered made when the original installation is complete. For a construction project it is considered complete when the taxpayer first uses the new structure.

If your residence has mixed business and personal use, only the percentage of the costs properly allocated to personal use may be used to calculate the credit. If the business use is less than 20% of the total use, no allocation is required. Taxpayers with an office at home need to watch this with care.

Any energy improvements financed with subsidized energy financing is not eligible for the credit. Theses subsidized loans may be from any federal, state, or local program.

Any improvement made during 2005 will not qualify for the credit. You would need to wait until 2006 to make the improvement, if you wish to claim the credit.

The total lifetime credit is $500. If you claim the full credit in 2006 there will be no additional credit in 2007 even if you move to a new principal residence in 2007.

The credit is limited to your tax liability. Any unused credits due to this limitation are lost! There is no carry forward or carry back of any unused credits.

The basis of the dwelling is reduced by the amount of the credit claimed on the tax return.