For improvements made in 2009 and 2010, you can get an income tax credit of up to $1,500 for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in your home. However, efficiency criteria will vary dependant on when these items are "placed in service" (installed).
What is a tax credit? You don’t receive an income tax credit when you buy the product, like an instant rebate. You claim the credit on your federal income tax form at the end of the year. The credit then increases the tax refund you receive or decreases the amount you have to pay.
Tax credits vs. tax deductions: In general, a tax credit is more valuable than a similar tax deduction. A tax credit reduces the tax you pay, dollar-for-dollar. Tax deductions – such as those for home mortgages and charitable giving – lower your taxable income. If you are in the highest 35-percent tax bracket, the income tax you pay is reduced by 35 percent of the value of a tax deduction. But a tax credit reduces your federal income tax by 100 percent of the amount of the credit.
Who gets it? Individuals who install specific energy-efficient home improvements.
What energy-efficient home improvements are eligible? The overall $1,500 cap can be reached in several ways with the purchase and installation of energy-efficient products that meet certain efficiency criteria:
· Exterior windows: Includes skylights and storm windows.
· Insulation, exterior doors, or roofs: Includes seals to limit air infiltration, such as caulk, weather stripping, and foam sealants, as well as storm doors.
· Central air conditioner, heat pump, furnace, boiler, water heater, or biomass (e.g. corn) stove: Starting in 2009, geothermal heat pumps are instead eligible for a separate tax credit—see Section 5 below.
How much is the credit? The tax credit amount is now 30 percent of the cost of the measures, including installation costs for heating and cooling equipment, but only product costs for windows, insulation, and other parts of the building “shell.” There is a cap on the credit amount of $1,500 for fiscal years 2009 and 2010 combined; thus the credit applies to up to $5,000 in total costs.
When is it available? The home improvements tax credit applies for improvements "placed in service" from January 1, 2009, through December 31, 2010. However, modifications to the criteria were made on products placed in service after February 17, 2009, the date of ARRA passage: products installed through February 16, 2009 are subject to the older criteria, but from February 17th onwards the new stricter criteria apply - except for exterior windows and skylights. The IRS defines "placed in service" as when the products or materials are ready and available for use – this would generally refer to the installation, not the purchase.
Exterior windows and skylights placed in service from January 1 through May 31, 2009 require only existing manufacturer certifications and Energy Star labels, as updates to criteria based on ARRA were not yet available during that timeframe. From June 1, 2009 onwards, the new, more stringent criteria apply. For more information on the June 1 window and skylight issue, see the IRS guidance and press release.
The credits were not available in 2008, but an earlier credit, with different criteria and credit amounts, was available in 2006 and 2007 (credits claimed in these past years do not count toward the $1500 cap).
What do I need to do to get the tax credit? You will need to file IRS Form 5695 with your taxes. In addition, you will need to keep at least receipts proving that you purchased the improvements and a copy of the manufacturer’s certification. Accountants and tax advisors should also be able to provide more guidance.