Article: Going Green Saving Green - Individual Energy Tax Credits

By Jacob Pratt and Thomas Booker

Nonbusiness Energy Property Credit (IRC Sec. 25C)

Individuals are allowed a nonrefundable personal income tax credit for certain energy efficient property installed in a dwelling located in the U.S. and owned and used by the taxpayer as the taxpayer's principal residence.

Taxpayers can only claim a 10% credit for qualified energy property placed in service in 2011 up to a $500 lifetime limit (with no more than $200 from windows and skylights). What's more, the credit claimed for any year can't exceed $500 less the total of the credits claimed for all earlier tax years ending after Dec. 31, 2005. The amount claimed for windows and skylights in a year can't exceed $200 less the total of the credits claimed for these items in all earlier tax years ending after Dec. 31, 2005. The credit is equal to the sum of: (1) 10% of the amount paid or incurred for qualified energy efficient improvements installed during the year; and (2) the amount of the residential energy property expenses paid or incurred during the year.

Examples of qualified energy efficiency improvements include:

• Insulation materials
• Exterior windows, including skylights
• Exterior doors
• Metal roofs with special pigmented coatings
• Certain asphalt roofs

The credit for residential energy property expenses can't exceed:

• $50 for an advanced main circulating fan;
• $150 for any qualified natural gas, propane, or hot water boiler; and
• $300 for any item of energy efficient property, such as:
• Electric heat pumps,
• Electric heat pump water heaters,
• Central air conditioners
• Stove using renewable plant-derived fuel.

Residential Energy Efficient Property Credit (IRC Sec. 25D)

Individuals are allowed a nonrefundable personal income tax credit for:

• qualified solar electric property,
• qualified solar electric property,
• qualified solar water heating property,
• qualified fuel cell property,
• qualified small wind energy property, and
• qualified geothermal heat pump property

placed in service after 2005 and before 2017. The credit is equal to 30% of the total cost of the qualified energy efficient property and is available on new construction, principal residence, and second home (rental property does not qualify).

Similar to the cost determination for nonbusiness energy property, the residential energy efficient property credit includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property and for piping and wiring to interconnect such property to the home.

One word of caution: the basis of the taxpayer’s home in which the residential energy efficient property is installed must be reduced by the amount of this credit taken.

Finally, both of these credits are claimed on Form 5695. Should the taxpayer be unable to use all of the credit because of the tax liability limit, the unused portion can carry forward to the next taxable year as credit.