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Going Green Tax Incentives

written by: patspence•edited by: BStone•updated: 5/31/2011

Federal energy tax credits, energy rebates, and low cost loans for home renewable energy systems make now the best time to invest in cost-saving improvements. Going green tax incentives, offered through 2016, will pay for 30% of the cost for qualifying systems.

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    Solar Panel Construction Saving on energy bills is important to all of us with the average annual U.S. residential utility bill at $1,767, according to the U.S. Department of Energy (DOE). That’s a lot of money that we’d enjoy being able to spend elsewhere without giving up our current standards of living. With energy prices only going up, making home improvements to reduce these costs is a wise investment that not only saves money but reduces the “carbon footprint" that is so costly to our environment and national security.

    Fortunately, there are other financial incentives for improving home energy efficiency besides reducing energy bills, thanks to the American Recovery and Reinvestment Act of 2009 (ARRA). This act has extended a number of going green tax incentives, which were created in the 2005 Energy Policy Act. This stimulus package includes over $40 billion in funds directed toward energy related issues of renewable energy production and energy conservation. It provides green tax credits and energy rebates as incentives to homeowners, home buyers, and builders to create jobs and reduce the environmental impact of fossil fuel use while addressing national energy security issues.

    Individual states, cities, and utility providers are also offering attractive incentives in rebates and low interest loans for improved residential energy efficiency that can be combined with green tax credits for even greater rewards. Knowing what they are, where to find them, and how to access these incentives is the key to making your home improvements more affordable now while investing in energy savings for the future. But, before discussing the who, where, and how of finding and accessing the rewards, it will help to know what the incentives are and how they work.

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    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.

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    Energy Rebates

    Energy rebates, or cash refunds after purchase, are offered by manufacturers and utility companies for energy efficient products. Manufacturers of Energy Star products offer them to stimulate sales and to help introduce new products to the marketplace. Manufacturers of many products such as programmable thermostats, dishwashers, refrigerators, HVAC systems, and more offer attractive rebates that can help you save money on these purchases that are not included in the federal energy tax credit program. Before you buy, check out the Energy Star rebate locator page for Special Offers and Rebates from Energy Star Partners or contact the manufacturers directly.

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    In addition to the valuable tax incentives available in federal energy tax credits and energy rebates offered by manufacturers and utility companies, low cost loans may be available as part of utility conservation programs to help you make those home improvements that will increase your home's energy efficiency and save you energy costs. By taking advantage of the going green tax incentives now, those savings plus savings on energy bills will provide a quick return on the investment.
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    Energy Rebates, cont.

    For a purchases in which a rebate is offered that also qualifies for federal energy tax credits, the rebate amount is deducted from the total cost, offering an additional 70 percent savings for that amount. For instance, if you receive a rebate of $200 on a geothermal heat pump costing a total of $5,000 installed, you would receive a federal energy tax credit of 30 percent of $4,800, or $1440. Your total expenditure for the heat pump would be $3360. Without the rebate, the total cost would be $3,500.

    Some utility companies offer rebates or other going green incentives for energy saving improvements including Energy Star appliances, insulation, home weatherization, and more. As part of a utility company’s energy conservation program, it may offer rate reductions or a credit to be used for future electrical purchases. There are utility companies that offer as a part of their utility rebate programs free weatherization for low income and disabled residents. Austin Energy is one of these, providing free attic insulation, weather stripping, sealing, repairing or replacing ductwork, installing solar screens, and caulking around plumbing openings for those who qualify for the program. These reductions and credits are not included in taxable income.

    To find out about utility rebates and offers in your area, visit the Database of State Incentives for Renewables & Efficiency.

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    Loan Programs

    Loan programs may be available in your area for low interest rate loans, or even zero interest rate loans, to help you make energy efficiency improvements. For example, Fort Collins Utilities offers the ZILCH (Zero Interest Loans for Conservation Help) Program to residential customers to help pay for windows, doors, clothes washers, insulation, furnaces, space heating systems, and much more. To find out if such a loan program is available in your area, visit the Database of State Incentives for Renewables & Efficiency.

    Other loan options may be available with favorable interest and rates for home improvements, including equity loans. Though it’s understandable that taking out a loan during these uncertain economic times may seem unwise, it may be an attractive option when combined with the currently available federal energy tax credits and rebate offers.

    To use as an example, let’s look at that $30,000 photovoltaic system that can provide the electrical needs for your home. At 6 percent interest, paid over 10 years, the monthly payment is $333.06 a month. If your current annual average electric bill is $200 a month, that loan payment becomes the equivalent of $133.06. With electric bills increasing, that figure will reduce over the ten year period relative to the cost of the electricity you would otherwise be purchasing. Also, you will receive $9,000 in cash in federal energy tax credits next April. As an added incentive, when your home solar system produces more energy than you use, the utility company will pay you for that energy.

    Something else to consider is that home improvements that increase the energy efficiency of your home increase its value for long term investment. The “greener" the home, the more appealing it is to buyers and the greater its valuation on the market. With the current going green tax incentives and other programs available, there has never been a better time to invest in renewable energy systems or improve the energy efficiency of your home.

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    References

    Database of State Incentives for Renewables & Efficiency, DSIRE, North Carolina State University.

    Federal Solar Energy Incentives, Solar Energy Industries Association.

    Federal Tax Credits for Consumer Energy Efficiency, Energy Star.

    Trey Granger, “Major Green Tax Deductions," Earth911.com, February 15,2010.

    Photo Attribution: Solar Panel Construction by Wayne National Forest from Flickr.