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Federal Tax Credits / Deductions
for Some Energy Efficiency projects in 2006 and 2007

 
 

 Consult your CPA, attorney or the IRS if you have Federal Tax questions

 


  U.S. EnergyStar Information on
  Energy Policy Act of 2005
 

  Tax Credits for Consumers

bulletHome Improvements
bulletCars
bulletSolar Energy Systems
bulletFuel Cells

 Tax Credits for Home Builders

 Tax Credits for Appliance Manufacturers

 Tax Deductions for Commercial Buildings

A tax credit can provide significant savings. It reduces the amount of income tax you have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces the tax itself. The final rules and forms to clarify which products and services qualify for the tax credits will be developed by The Internal Revenue Service (IRS). You must refer to the final IRS rules to determine what qualifies for the tax credit. We will link to this information as soon as it is available.

Please note, not all ENERGY STAR qualified homes and products qualify for a tax credit. These tax credits are available for a number of products at the highest efficiency levels, which typically cost much more than standard products. If, for whatever reason, you decide not to purchase a product covered by the tax credit, you may still consider purchasing an ENERGY STAR product. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit.

Tax Credits for Consumers:

Home Improvements
The Internal Revenue Service (IRS) has provided guidance for consumers: IRS Notice 2006-26 PDF Exit ENERGY STAR ENERGY STAR is studying IRS guidance and will update this website with updates soon.

Tax credits are available for many types of home improvements including adding insulation, replacement windows, and certain high efficiency heating and cooling equipment. See chart. The maximum amount of homeowner credit for all improvements combined is $500 during the two year period of the tax credit. This tax credit applies to improvements made from January 1, 2006 through December 31, 2007.

Solar Energy Systems
Tax credits are available for qualified solar water heating and photovoltaic systems. The credits are available for systems "placed in service" in 2006 and 2007. The tax credit is for 30 percent of the cost of the system, up to $2,000. This credit is not limited to the $500 home improvement cap.

Fuel Cells
There is a consumer tax credit of up to 30% of the cost (up to $500 per 0.5 kW of capacity maximum) for installing a "qualified" fuel cell and microturbine systems. The credits are available for systems "placed in service" in 2006 and 2007. This credit is not limited to the $500 home improvement cap.

 

ENERGY POLICY ACT OF 2005
SUMMARY OF TAX CREDITS FOR HOMEOWNERS
Product Category Product Type Tax Credit Specification Tax Credit Notes
Windows & Doors Exterior Windows and Skylights ENERGY STAR qualified OR meets IECC¹ 10% of cost, up to $200² for all windows, skylights and storm windows All ENERGY STAR labeled windows and skylights qualify for tax credit. Installation costs are not included. Learn more about ENERGY STAR qualified windows and skylights.
Storm Windows Meets IECC¹ in combination with the exterior window over which it is installed, for the applicable climate zone 10% of cost, up to $200² for all windows, skylights and storm windows More clarification will be available soon. Check back.
bulletManufacturer's Certification Statement³ required.
Exterior Doors Meets IECC¹ 10% of cost, up to $500² ENERGY STAR doors will almost always qualify, except for certain parts of California4. Installation costs are not included. Learn more about ENERGY STAR qualified doors.
bulletManufacturer's Certification Statement³ required.
Storm Doors In combination with a wood door assigned a default U-factor by the IECC¹, and does not exceed the default U-factor requirement assigned to such combination by the IECC 10% of cost, up to $500² More clarification will be available soon. Check back.
bulletManufacturer's Certification Statement³ required.
Roofing Metal Roofs ENERGY STAR qualified 10% of cost, up to $500² All ENERGY STAR labeled metal roofs qualify for the tax credit.
bulletMust be expected to last 5 years OR have a 2 year warranty.
bulletInstallation costs are not included.
bulletManufacturer's Certification Statement³ required.
Insulation Insulation Meets 2000 IECC & Amendments 10% of cost, up to $500²
bulletFor insulation to qualify, its primary purpose must be to insulate. (example: vapor retarders are covered, siding does not qualify).
bulletMust be expected to last 5 years OR have a 2 year warranty
bulletInstallation costs are not included.
bulletManufacturer's Certification Statement³ required.
HVAC Central A/C EER 12.5/SEER 15 Split Systems
EER 12/SEER 14 Package systems		 $300² For a list of qualified products, go to the Consortium for Energy Efficiency product directory Exit ENERGY STAR, click on the Air Conditioners and in the "CEE Tier" enter "Residential Tier 2."

Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is:
EER 11.5/ SEER 14 Split systems
EER 11/SEER 14 Package systems
bulletManufacturer's Certification Statement³ required.
Air Source Heat Pumps HSPF 9 EER 13 SEER 15 $300² Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is:
HSPF 8.2 EER 11.5 SEER 14 Split systems
HSPF 8 EER 11 SEER 14 Package systems
bulletManufacturer's Certification Statement³ required.
Geo-Thermal Heat Pump Same criteria as ENERGY STAR:
EER 14.1 COP 3.3 Closed Loop
EER 16.2 COP 3.6 Open Loop
EER 15 COP 3.5 Direct Expansion		 $300² All ENERGY STAR labeled geo-thermal heat pumps qualify for the tax credit.
bulletManufacturer's Certification Statement³ required.
Gas, Oil, Propane Furnace or Hot Water Boiler AFUE 95 for both furnaces and boilers $150² For a list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR

Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is:
AFUE 90 for furnaces
AFUE 85 for boilers
bulletManufacturer's Certification Statement³ required.
Advanced Main Air Circulating Fan No more than 2% of furnace total energy use $50² For a list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR
bulletManufacturer's Certification Statement³ required.
Water Heaters Gas, Oil, Propane Water Heater Energy Factor 0.80 $300² Only some tankless water heaters currently qualify. This is about 20 percent more efficient than the current federal standard.

For a list of qualifying products go to the Gas Appliance Manufacturing Association Exit ENERGY STAR.

bulletManufacturer's Certification Statement³ required.
Electric Heat Pump Water Heater Energy Factor 2.0 $300² This is more than twice as efficient as the current federal standard.
bulletManufacturer's Certification Statement³ required.
Cars Cars Hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles Based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models Guidance for auto manufacturers Exit ENERGY STAR is available from IRS.

There is a 60,000 vehicle limit per manufacturer before a phase-out period begins. Consumers who buy from companies that already sell large numbers of qualifying vehicles will experience a relatively short "window of opportunity" for the credits.
Solar Energy Systems Solar Water Heating
bulletAt least half of the energy generated by the "qualifying property" must come from the sun. Homeowners may only claim spending on the solar water heating system property, not the entire water heating system of the household.
bulletThe credit is not available for expenses for swimming pools or hot tubs.
bulletThe water must be used in the dwelling.
bulletThe system must be certified by the Solar Rating and Certification Corporation (SRCC).
30% of cost, up to $2,000  
Photovoltaic Systems Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement. 30% of cost, up to $2,000  
Fuel Cells Fuel Cells Efficiency of at least 30% and must have a capacity of at least 0.5 kW. 30% of the cost, up to $1000 per kW of power that can be produced  

 

1Either the 2001 Supplement of the 2000 International Energy Conservation Code or the 2004 Supplement of the 2003 International Energy Conservation Code.

2Subject to a $500 maximum per homeowner for all improvements combined.

3A Manufacturer's Certification is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. The IRS encourages manufacturers to provide these Certifications on their website to facilitate identification of qualified products. Taxpayers must keep a copy of the certification statement for their records, but do not have to submit a copy with their tax return.

4The California counties where ENERGY STAR qualified doors may not qualify are: Alpine, Lassen, Modoc, Mono and Plumas.

 

Tax Credits for Home Builders:

The Internal Revenue Service (IRS) has provided the following guidance regarding the tax credits for constructing energy efficient new homes available under the Energy Policy Act of 2005:

bulletIRS Notice 2006-27 PDF Exit ENERGY STAR provides guidance for the credit for building energy efficient homes other than manufactured homes.
bulletIRS Notice 2006-28 PDF Exit ENERGY STAR provides guidance for the credit for building energy efficient manufactured homes.

The tax credit information provided below is based on information contained in the Energy Policy Act of 2005. The IRS guidance provides specific information that home builders and housing manufacturers can rely on to take action to claim the tax credits. ENERGY STAR will study the IRS publications and provide updates as necessary.

Home builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50 percent energy savings for heating and cooling over the 2004 International Energy Conservation Code (IECC) and supplements. At least 1/5 of the energy savings must come from building envelope improvements. This credit also applies to contractors of manufactured homes conforming to Federal Manufactured Home Construction and Safety Standards.

There is also a $1,000 tax credit to the producer of a new manufactured home achieving 30 percent energy savings for heating and cooling over the 2004 IECC and supplements (at least 1/3 of the savings must come from building envelope improvements), or a manufactured home meeting the requirements established by EPA under the ENERGY STAR program.

Please note that, with the exception of the tax credit for an ENERGY STAR qualified manufactured home, these tax credits are not directly linked to ENERGY STAR. Therefore, a builder of an ENERGY STAR qualified home may be eligible for a tax credit but it is not guaranteed.

These tax credits apply to new homes whose construction is substantially completed after August 8, 2005 and that are acquired from the eligible contractor after December 31, 2005 and before January 1, 2008, for use as a residence.

Tax Credits for Manufacturers:

While not directly affecting consumers, manufacturers of energy efficient clothes washers, dishwashers and refrigerators are eligible for tax breaks themselves, which may lead to increased availability and a reduction in prices for these energy-saving appliances:

bullet ENERGY STAR qualified dishwashers that meet ENERGY STAR's 2007 specification.
bullet ENERGY STAR qualified clothes washers that meet ENERGY STAR's 2007 specifications.
bulletRefrigerators that are more efficient than 2001 federal energy conservation standards

 

Tax Deductions for Commercial Buildings:

A tax deduction of up to $1.80 per square foot is available to owners or designers of new or existing commercial buildings that save at least 50% of the heating and cooling energy of a building that meets ASHRAE Standard 90.1-2001. Partial deductions of up to $.60 per square foot can be taken for measures affecting any one of three building systems: the building envelope, lighting, or heating and cooling systems. These deductions are available for buildings or systems placed in service from January 1, 2006, through December 31, 2007.

For More Information:

bulletTax Incentives Assistance Project (TIAP)
bulletCommercial Building Tax Deduction Coalition 
bullet Energy Bill PDF 


 

Additional resources on line about possible Federal tax deductions
for energy efficiency improvements .
 
GENERAL LINKS
 
 Lighting Tax deduction  (Nice site with data and process descriptions!)
 
Lighting Interim Rules

 

 

 IRS Rules 6/2/06
 

 

IRS Unveils Procedure Enabling Commercial Property Owners to Qualify for Energy Efficiency Deduction
 
IR-2006-88, June 2, 2006

WASHINGTON — The Internal Revenue Service today issued an advance copy of a notice on how commercial building owners or leaseholders can qualify for the tax deduction for making their building energy efficient. The notice establishes a process to certify the required energy savings in order to claim the deduction.

The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings.

The amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50-percent energy savings target. The notice provides that buildings below the 50-percent threshold may, nevertheless, qualify for a deduction of up
to 60 cents per square foot of building floor area if they meet a
16-percent energy savings target.

Before claiming the deduction, the taxpayer must obtain a certification that the required energy savings will be achieved. Today’s notice prescribes the content of that certification and the qualifications that must be met by the person providing the certification.

The notice also announces that the Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list.