Home Improvements Could Reduce Your Federal Income Taxes

Are you thinking about making home improvements?  If so, consider options that increase the energy-efficiency of your home.  As a result, you could receive a credit on your federal income taxes.  This incentive only applies to improvements completed during the 2006 and 2007 calendar years. 

To reach the $500 lifetime limit, you can use a combination of the following items:

1)      Energy Efficiency Improvements – on existing homes; limited to 10% of the cost of the items; items must reduce heat loss or gain in order to qualify; excludes the cost of installation

a)      insulation

b)      exterior windows including skylights (limited to $200)

c)      exterior doors

d)     metal roof (with heat-reducing pigments)

2)      Residential Energy Property Expenditures – on existing homes; 100% of the cost of the items and the installation costs

a)      advanced main air circulating fans (limited to $50)

b)      furnace or hot water heater (limited to $150)

c)      “energy efficient building property” (limited to $300) – includes heat pumps and central air conditioners

Items from both categories should have an expected lifespan of 5 years or more, be installed in the taxpayer’s primary residence and all items must be new (not used). 

First check with the manufacturer to find out if an item is eligible for the credit.  In some cases, you will be able to obtain a manufacturer’s certification statement directly from their website.  You should retain the statement and product packaging section that describes the energy efficiency ratings with your tax records for the appropriate year.  You will not need to submit the data with your tax return but may be required to show it during the course of an audit.  In the case of windows, skylights and metal roofs, you will not need a manufacturer’s certification statement if the items have the Energy Star label.  A detailed chart of qualified items is available at the Energy Star website by going to www.energystar.gov and clicking on the link to “Tax Credits Under the Energy Bill.” 

Do not confuse the options mentioned above with the $1,000 or $2,000 credits available to homebuilders for new energy-efficient homes.  In addition, solar energy systems and fuel cells follow a different set of guidelines.  For these improvements, the limit is set to $2,000.  The credit is calculated by taking the lower of $2,000 or 30% of the cost of the system.