Although the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) included a variety of favorable provisions (see previous Blog posts for discussion of these benefits and planning associated with claiming bonus depreciation for certain SUVsn SUVs), it has substantially reduced the benefits associated with the nonbusiness energy property credit. The new law reduces the credit 10% from 30% and it reduces the lifetime limit from $1,500 to $500.
Prior Law – Generous Credit for 2009 and 2010
Individuals are allowed a nonrefundable personal income tax credit, known as the nonbusiness energy property credit, for certain energy efficient property installed in a dwelling located in the U.S. and owned and used by the taxpayer in the taxpayer's principal residence. Under pre-2010 Tax Relief Act law, the credit was equal to 30% of the sum of: (1) the amount paid or incurred by the taxpayer during the tax year for qualified energy efficiency improvements (building components meeting certain requirements such as windows) installed during the tax year, and (2) the amount of residential energy property expenditures paid or incurred by the taxpayer during the tax year for the purchase of: (a) advanced main air circulating fans; (b) qualified natural gas, propane, or oil furnace or hot water boilers; and (c) energy-efficient building property. The aggregate amount of the credit allowed for a taxpayer for tax years beginning in 2009 and 2010 was $1,500. The credit was scheduled to expire at the end of 2010.
New Law – Reduced or Eliminated Credit for 2011
Under the 2010 Tax Relief Act, subject to a lifetime $500 maximum, the nonbusiness energy property credit is equal to the sum of: (1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the tax year, and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year. As a result, the nonbusiness energy property credit is now a 10% credit, instead of a 30% credit. In addition, your lifetime maximum nonbusiness energy property credit is no longer $1,500; instead, it is reduced to $500, of which no more than $200 may be for expenditures on windows.
Specifically, the nonbusiness energy property credit allowed to a taxpayer for a tax year cannot exceed the excess (if any) of $500 over the aggregate nonbusiness energy property credits allowed to that taxpayer for all earlier tax years ending after December 31, 2005. In addition, the credit allowed for residential energy property expenditures cannot exceed: (1) $50 for each advanced main air circulating fan; (2) $150 for each qualified natural gas, propane, or oil furnace or hot water boiler; and (3) $300 for each item of energy-efficient building property.
Essentially, the credit rates, dollar limits, and lifetime limits that are in effect for 2011 are those that were in effect for 2006 and 2007 before the 2009 Recovery Act provided an enhanced nonbusiness energy property credit for 2009 and 2010. Thus, the 2010 Tax Relief Act returns the credit to its earlier, less generous form for 2011.
To apply the $500 lifetime limit, you must look back to all tax years for which the nonbusiness energy property credit was in effect. Those years include 2006 and 2007, when the credit was subject to a $500 lifetime limit, and 2009 and 2010, when there was a $1,500 aggregate limit. If the total of nonbusiness energy property credits for all earlier years is $500 or more, you cannot claim a credit for 2011. If the total is less than $500, you can claim up to $500 minus the total credits claimed in earlier years.
The 2010 Tax Relief Act also restores to their earlier levels certain efficiency standards that were previously more lenient. The tightening of standards will make it harder to qualify for a nonbusiness energy property credit for the affected items. The 2010 Tax Relief Act also reinstates the rule that denies the credit for expenditures made from subsidized energy financing. As a result, it excludes financing provided under a federal, state, or local program that has a principal purpose to provide subsidized financing for projects designed to conserve or produce energy.
For 2011, exterior windows, skylights, and exterior doors can qualify for the credit by meeting the Energy Star program requirements. This change will make it easier to claim the credit for exterior windows, skylights, and exterior doors, because taxpayers can rely on the Energy Star label for those items.