Make Home Improvements This Summer

Summer is a great time to handle all those home improvements you have been wanting to do. Now is the time with the 2009 energy efficiency tax credits. Under the American Recovery and Reinvestment Act (ARRA) of 2009, the energy tax credit was increased. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

Note: A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as "energy efficient" for purposes of this tax credit.

The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards.

Homeowners may continue to rely on manufacturers' certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

Further, the Residential Energy Efficient Property Credit is a nonrefundable energy tax credit that helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.

Residential Energy Credit: A Difference of Opinion

There seems to be a difference of opinion regarding whether newly constructed homes qualify for the credits claimed on Form 5695, Residential Energy Credits.

Taxpayers who build a new residence in 2006 that included energy-efficient windows, doors, furnace, air conditioning, and water heater have all of the required manufacturer’s certifications and Energy Star ratings. They assume that the residential energy credit can be calculated on their tax return. Let’s see if they qualify for the credit.

While a manufacturer’s certification states that a particular product or component qualifies for the energy tax credit, the product must be installed as an improvement to an existing residence. For example, the taxpayer has to take out the old windows and install new energy-efficient windows, or tak out the old storm doors and install new energy-efficient storm doors. In other words, at the time of installation the house must already be owned and used as the taxpayer’s principal residence.

Taxpayers who have made qualified engery-efficient improvements to their existing personal residence must keep a copy of the manufacturer’s certification statement in their records and should not attach it to their tax return.

Additional reading:

Don't Overlook These Valuable Tax Credits