Federal Energy Tax Credits
Federal tax credits are significantly more valuable than tax deductions because they reduce the tax amount owed dollar-for-dollar for a tax savings of the entire amount rather than as a percentage of tax owed. For example, a $1,000 dollar tax deduction for someone with an income of $50,000 would reduce the taxable income to $49,000. At a 10 percent tax rate, the income tax due would be reduced from $5,000 to $4,900, offering a savings of $100. A tax credit of $1,000 reduces the entire tax due by $1,000. In other words, that $5,000 in tax due without the credit would result in a total $4,000 with the credit.
Federal energy tax credits have been increased by ARRA to the amount of $1,500. They can be used to help cover up to 30 percent of the costs, excluding labor, of many Energy Star rated improvements, including windows, doors, insulation, cooling and heating systems, metal and asphalt roofs, and water heaters. These credits are good for existing homes only through December 31, 2010.
Additionally, the ARRA is offering no limit tax credits, i.e. no cap of $1,500, of the full 30 percent of the cost for renewable energy systems including solar panels, photovoltaic systems, small wind turbines, and geothermal heat pumps for both existing and new homes through 2016. This means that the stimulus package funds will directly pay for almost a third of the total cost, including labor. For example, if a homeowner has a photovoltaic system installed to provide the electrical energy for the home that costs a total of $30,000, a tax credit of $9,000 will be earned to reduce the total cost to $21,000.
Though there is a maximum $1,500 tax credit for improvements other than renewable energy systems, regardless of how many improvements made or their cost, this is completely separate from the no upper limit renewable energy systems. This means that if you added Energy Star windows and received the maximum $1,500 tax credit for those, you can also receive the green tax credit for new solar panels, for instance $5,000, for a total tax credit of $6,500. You cannot receive more in tax credits than federal income tax owed, but you can carry forward the no-limit tax credits to future years.
To find out the specifics of the energy efficient improvements that qualify for these valuable going green tax incentives and how to apply, visit the Energy Star page for Federal Tax Credits for Consumer Energy Efficiency.