The Energy Tax Credit
by: Iowa Legal Aid
Some home improvements you made or are thinking about may get an energy tax credit. For the 2006 and 2007 tax years, homeowners can claim an energy credit for some energy-efficient home improvements. The improvements must be made after December 31, 2005, and before January 1, 2008.
What Credits Can I Get?
A credit of up to 10% for
- Insulation to reduce heat loss or gain
- Exterior windows (Maximum of $200 credit)
- Exterior doors
- Metal Roofs (Energy Star rated)
A maximum credit of
- $50 for an advanced main air circulating fan
- $150 qualified furnace or hot water heater
- $300 for other items qualifying for the credit under the new rules. (Details are in Internal Revenue Service Bulletin 2006-11)
The combined energy credit cannot be more than $500 for both tax years.
How Does It Work?
Example 1:
Roger and Terri need a new furnace. The kids broke the storm door and it needs to be replaced, too. Roger and Terry spend $2000 on the furnace and $200 on a storm door.
Roger and Terri's furnace dealer sells them a furnace with an energy credit certification. The furnace is installed in October of 2006. Roger and Terri put a copy of the purchase receipt and certificate in their tax file. The storm door is not installed until April 2007.
Roger and Terri get their taxes done in April of 2007. They can claim a maximum credit of $150 for the furnace and will have to fill out form 5695. Roger and Terri may be able to claim a credit for the storm door on their 2007 taxes. Roger and Terri have to find out whether the storm door combined with their existing door is efficient enough to claim a 10% credit for it.
Homeowners need to ask if the items they install are certified for the energy credit. The manufacturer must make sure items they say meet the energy credit standards actually do. Taxpayers don't need to send proof of certification with their tax return. They will need to keep booklets and certificates of energy credit eligibility with tax records.
This is a tax credit. It goes to help reduce the amount of tax you might owe. If you don't owe any taxes, it won't be a benefit to you.
Example 2:
John is single and has no dependents. He made $15,000 in 2006. He also had $1,500 taken out of his paycheck during the year for taxes. John's 2006 tax obligation would be about $653 before credits.
Earlier in the year, the water heater in his house quit working. He replaced it with a new more efficient heater which is eligible for the energy tax credit.
The $150 energy tax credit is the only credit for which he qualifies. The energy tax credit will reduce the taxes John must pay to $503. Since he paid $1,500 in tax withholding from his paychecks during the year, he will get a refund of $997. If John didn't apply for the energy credit, he would get only $847 for a refund.
Getting Help With Your Taxes
When you do you taxes next year, remember to check out the energy credit. In Iowa you can get free tax preparation. To find the site nearest to you, contact any Iowa Legal Aid office. Ask for information about free tax sites. If you are having problems with the IRS, you may be able to get free help through our Low-Income Taxpayer Clinic. For the office serving your county, call 1- 800 532-1275 or 1- 800 272-0008 (Espaņol).
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