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Tax Breaks for Energy Efficient Homes

By: Guest Contributor, Aby League

In a bid to address climate change, promoting sustainability efforts and replacing fossil fuels with renewable energy sources are viewed as the key solution.

According to the World Bank, urgent actions are needed as the world is set to be 4 degrees warmer by the end of the century, bringing in “cataclysmic changes” including extreme heat waves, rising sea-levels and declining global food stock.

To this end, among the actions undertaken across the world is the implementation of credits for renewable energy projects.

A renewable energy credit is any tax credit offered by governments as an incentive for the installation and operation of renewable energy systems like solar and wind power. Many countries already have this mechanism including the United States, Europe, China and Japan.

The tax credit commonly applies to businesses and organizations, however, recognizing the economical as well as environmental benefits that could be reaped from “green” systems, some governments, particularly the U.S., offer tax breaks for home improvements that make homes more energy efficient.

The United States is the world’s second largest energy consumer behind China, said the United Nations, which encourages the country to reduce its energy consumption and improve energy efficiency across all sectors including residential.

Residential energy tax credits

As part of the fiscal cliff deal stipulated on President Obama’s American Recovery and Reinvestment Act of 2009, homeowners will receive Federal tax credits for eligible renewable and energy efficiency improvements.

Reinstated at early 2013, the law extended the residential energy tax credits until December 31 of this year.

To qualify for the Federal tax credit, homeowners must have qualifying energy-efficient properties in their main residences within the period of 2006 through 2013. They must have purchased energy-efficient equipment, which should remain installed for at least five years.

Under the ARRA, there two types of credits. First is the non-business energy property credit, which applies to those who make qualified green upgrades to their existing homes, including insulation, energy-efficient exterior windows and doors, furnaces and efficient heating and air-conditioning systems.

This credit is 10 percent of the cost of qualified energy-efficient improvements, excluding labor costs, up to a cap of $500 for fiscal years 2006 to 2013 combined. However, when homeowners already claimed more than $500 tax credit since 2006, they can no longer claim credit for 2011 though it does not affect the $1,500 credit limit set for 2009 and 2010 combined.

Another is the residential energy efficient property credit, which helps individual taxpayers pay for qualified residential alternative or renewable energy equipment like solar panels, solar-powered heaters, geothermal heat pumps, small wind systems and fuel cells.

Running through 2016, this type of credit is a percentage of the eligible properties and unlike non-business energy property credit, this includes labor costs and there is no cap on the amount of credit available except for fuel cell properties. Fuel cell properties are capped at $500 per kilowatt hour of power capacity.

To claim a tax credit, homeowners have to file an IRS residential energy credit form 5695 together with their federal income tax return for the year the improvements were made. The credit will be deducted from the total amount of tax that they have to pay, or it can be added to their tax refund.

Encouraging energy efficient investments

On the average, a U.S. energy department report shows about half of the energy consumed by American homes is expended on space conditioning. In particular, 30.7 percent is used for heating systems while 11.5 percent for cooling systems.

According to Ronnie Kweller, spokesperson of non-profit group Alliance to Save Energy, tax breaks would be a great move to help in encouraging consumers to think about energy saving investments for their homes.

While it is true that residential energy tax credits could motivate many consumers, a fraction of them knows about this policy. In different lists by consultancy firm Ernst and Young and publisher Kiplinger, credits for home improvements is identified as one of the most and commonly overlooked tax deductions.

It is a challenge for the government to increase awareness about incentives for energy-efficiency home retrofits so more householders will be motivated to purchase energy efficient products and opt for more energy efficient lifestyle. On the other hand, both Ernst and Young and Kiplinger point out that it is also taxpayers’ duty to keep updated of the tax developments, such as the tax breaks for home improvements, to utilize them to their advantage.

“When you invest in energy-efficient products, you may be saving money on both your energy bills and your tax return,” said the International Revenue Service in a news release.

Moreover, the A.S.E. noted making homes more energy-efficient significantly improves the economy as it saves hundreds of dollars; improves energy security as it decreases the overall demand for energy; preserves the environment as it reduces pollution; and uplifts quality of life as it makes it safer and more comfortable.

About the Author: Aby League is a qualitative researcher and a passionate writer. She has a Bachelor’s Degree in Biology and is currently taking her Master’s while also balancing her time as a freelance writer and researcher.

Tax break image via Shutterstock.

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