It Pays to Be Green: Federal Tax Credits for Energy Efficiency

It Pays to Be Green: Federal Tax Credits for Energy Efficiency

The key behind turning something that is considered a fad into a permanent phenomenon is to incentivize people. There is no better demonstration of this than the federal government’s efforts to encourage people to become more environmental conscious in the rituals of daily life. This is certainly one of the goals underpinning recent tax credits for taxpayers who made energy efficiency improvements or installed renewable energy systems in their homes in 2009. These individuals can claim these credits, which were part of the 2009 American Recovery and Reinvestment Act, on their federal income return for 2010.

IRS Enrolled agent Michelle Andover expects to see a surge in taxpayers capitalizing on this opportunity. “I know I advised many of my clients to consider making these green improvements as a way of boosting their federal return.” Discussion of energy-related tax credits was also incorporated into tax CPE, tax continuing education courses for CPAs, enrolled agents and other tax professionals, last year, a factor that is also likely to boost the number of such claims.

For the registered tax agent who isn’t yet up to speed on these energy-related tax credits, below is a summary of the relevant tax credits that were either created or expanded as part of the 2009 Act.

Residential Energy Property Credit

This tax credit is designated for individuals who made qualified energy efficient improvements to their existing homes. In terms of its value, the credit is 30 % of the cost of all qualifying improvements. The maximum amount that can be claimed is $1,500 for improvements made in both 2009 and 2010. Typical qualifying improvements include adding the following:

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insulation

energy efficient exterior windows

energy-efficient heating and air conditioning systems

Residential Energy Efficient Property Credit

This tax credit assist individual taxpayers with paying for such qualified residential alternative energy equipment as solar hot water heaters, solar electricity equipment and wind turbines and geothermal heat pumps installed in the home. The credit, which runs through 2016, is valued at 30 % of the cost of qualified property.

Plug-in Electric Drive Vehicle Credit

ARRA modifies this particular credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. The minimum amount of the credit, which runs through 2014, is $2,500. The credit also maxes out at $7,500, depending on the battery capacity. ARRA phases out the credit for each manufacturer after they sell 200,000 vehicles.

Plug-In Electric Vehicle Credit

This tax credit applies to two types of plug-in vehicles: (1) certain low-speed electric vehicles and (2) two- or three-wheeled vehicles. The amount of the credit is 10 % of the cost of the vehicle, with a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012.

Credit for Conversion Kits

This amount of this credit is 10 % of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle. The conversation must have happened after Feb. 17, 2009. The maximum credit, which runs through 2011, is $4,000.

Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT

Beginning in 2009, ARRA will allow the Alternative Motor Vehicle Credit, inclusive of the tax credit for purchasing hybrid vehicles, to be applied against the Alternative Minimum Tax. Prior to the new law, taxpayers were unable to use the Alternative Motor Vehicle Credit to offset the AMT.

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Given the increasing popularity of these credits, with more of the kind slatted for 2011, tax professionals will undoubtedly start to learn more about them in continuing education tax courses and books this year.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.