The holidays are behind us. Decorations are put away. Winter has finally arrived with frigid temperatures, and with it generally comes higher heating bills. For some, this is what they have been waiting for because it is the first opportunity to test their home or building renovations or improvements. Over the last few years, the IRS has provided incentives for taxpayers to live greener, more energy-efficient lives. In an attempt to reduce energy consumption and expand the use of clean energy, tax credits enable homeowners and businesses to lower their tax bill while taking a bit of the bite out of the initial investments in putting green energy systems are in place.
Just before the end of 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015, which extended some of these incentives and in certain cases retroactively to the beginning of 2015. Given the uncertainty and last-minute changes surrounding these incentives in 2015, there are opportunities to revisit costs incurred during 2015 and plans for next year to determine whether improvements qualify for these incentives. Accordingly, below are details of these incentives to reassess the opportunity.
Taxpayers who upgrade their homes to improve energy efficiency or make use of renewable energy may be eligible for tax incentives to offset some of the costs:
Residential Energy Efficiency Property Credit – No Credit Limit
- The credit is equal to 30% of the cost, including the installation.
- Equipment that qualifies for this includes solar, wind, geothermal, and fuel cell technology.
- This credit is available for both principal and second homes. The home or building must be in the United States.
- There is no limit on the amount of the credit for solar, wind, and geothermal equipment. However, there are limits for fuel cell equipment.
Good through 2016.
Here’s an example of the impact of this credit: A homeowner taxpayer who purchases $50,000 of geothermal equipment can receive a whopping $15,000 credit under this energy incentive program. Since there is no limit, taxpayers can keep “greening” their homes with qualified improvements and not be limited with regard to claiming this powerful credit.
Nonbusiness Energy Property Credit – $500 Lifetime Credit Limit
- The credit is equal to 10% of the cost of the qualified energy efficiency improvements to existing homes and 100% of residential energy property costs.
- Equipment and materials qualify only if they meet technical efficiency standards set by the Department of Energy. The manufacturer should provide the necessary documentation on whether a particular item meets these standards. Generally, the documentation comes in the form of a certification by the manufacturer. This is not required to be attached to the tax return, but a copy must be kept as support in case requested upon audit.
- Qualified energy efficiency improvements include home insulation, exterior doors, exterior windows and skylights, and certain roofing materials.
- Residential energy property costs include electric heat pumps, water heaters, central air conditioning systems, water heaters, stoves that use biomass fuel, furnaces, hot water boilers, and circulating fans for furnaces.
- There is a $500 lifetime credit limit that a taxpayer can claim overall for this credit for all qualified years. In addition, there are additional maximum sub-limits as follows:
- Windows - $200
- Furnace circulating fan - $50
- Furnace or boiler - $150
- Single residential energy property cost - $300
- Good through 2016
AMT Implications and Carryforward Benefit
Credits can be applied to both your regular tax liability and the AMT! Any unused credit can be carried forward to the next year.
For individual taxpayers to claim these incentives, Form 5695, Residential Energy Credits, must be prepared and attached to the tax return.
Reducing Tax Basis
Claiming either of the tax credits will reduce the tax basis of the home or building by an amount equal to the total of both credits claimed. Lowering the tax basis will have the effect of increasing the gain (or reducing the loss) that will need to be reported when the home or building is sold.
For individuals, this may not be as relevant because the tax law excludes up to $250,000 of gain from the sale of the home (or $500,000 for couples filing jointly), so the basis reduction is unlikely to have any adverse tax consequences. Regardless of the outcome, it’s a good idea to retain a copy of the Form 5695 until the home is sold.
Businesses are not left out in the cold with respect to tax savings from energy tax incentives. In the next blog post, we will explore some of the different ways that businesses can slice their tax bill.