You may be able to claim a tax credit for 10% of the cost of energy-saving home improvements, up to a lifetime maximum of $500.  There are lower limits on certain types of improvements, but by combining them, you could save up to $500.  A credit is a direct reduction of your taxes, as opposed to a deduction on your income It is a dollar-for-dollar savings.

Energy Efficiency Tax Benefits for Home and Business

The tax benefits available for making energy-saving improvements in your home or your business include the following:

• Tax credits for solar energy systems in residences,
• Tax deductions for highly energy-efficient commercial buildings,
• Tax credits for highly energy-efficient new homes,
• Tax credit for energy-saving home improvements,
• Tax credits for residential fuel cell systems, and
• Tax credits for fuel cells and microturbines used in a business.

Solar Energy

There are two credits available for the use of solar energy in your home.  There is a 30% tax credit, up to a maximum of $2,000, for a solar-powered water heating system that you install for use in your home, provided the system is not used just for heating swimming pools and hot tubs.  To be eligible for this credit, the system must be certified by the Solar Rating and Certification Corporation (SRCC) and must produce 50% or more of the hot water needed in the residence.  The second credit is for 30% of the cost of a solar photovoltaic (PV) system, also up to a maximum of $2,000.   There is no qualification requirement for a PV system.  A taxpayer can claim either or both of these solar energy credits.  There is also a production tax credit of 30% available to manufacturers of these solar energy systems.

Consumers may also see some indirect benefits in the form of lower prices and reduced energy bills for energy-efficient appliances, such as washers, dryers, dishwashers, and refrigerators, as a result of a $100 or higher credit available to the manufacturers of these appliances, if they meet the current Energy Star energy-efficiency standards.

Commercial Buildings

Taxpayers may be able to claim a deduction of $1.80 per square foot for commercial buildings when they achieve a 50% reduction in annual energy cost to the user of the building, as compared to a certain base standard according to the American Society of Heating, Refrigerating and Air-Conditioning Engineers, and the Illuminating Engineering Society of North America.

The tax incentive contemplates the energy costs of heating and cooling, lighting, and water heating.  And the types of commercial buildings eligible for the tax deduction include offices, retail buildings, warehouses, rental buildings of four stories or more, and publicly-owned buildings.  Compliance is determined by third party inspectors, and energy savings are determined based on software certified by the Department of Energy.

New Homes

Homebuilders can claim a tax credit of $2,000 for new homes that reduce energy use for heating and cooling by 50% as compared to the national model code from the 2004 International Energy Conservation Code (IECC) Supplement.  The fabrication of manufactured homes may qualify for a credit of $1,000 for achieving a 30% reduction in energy use.  Here again, third-party inspectors determine compliance, and software certified by the Department of Energy is used to determine the energy savings achieved.

Energy-Saving Home Improvements

There are two types of tax benefits available for energy-saving measures for existing homes: one is a credit for 10% of the amount spent on qualified energy efficiency improvements, and the other is a credit of up to $300 for qualified energy property.  The total of the two types of credits is subject to a $500 maximum.

Qualified energy efficiency improvements include:

• Insulation or a system designed to reduce heat loss or gain,
• Exterior windows, including skylights,
• Exterior doors,
• A metal roof with pigmented coating designed to reduce heat gain.

Qualified energy property includes:

• Electric heat pump water heater,
• Electric air source heat pumps,
• Geothermal heat pumps,
• Energy-efficient central air conditioner,
• Water heaters,
• Furnace or boiler, and
• Advanced main air circulating fan.

Each of these types of properties have specific energy efficiency criteria that must be met.

The tax credit limits that apply for qualified energy property are:

• $50 for a main air circulating fan,
• $150 for a furnace or boiler, and
• $300 for any item of qualified energy property.

If you have more than one item of qualified energy property, or qualified energy efficiency improvements, you can combine the individual credit limits as noted above, up to the $500 maximum credit.

Residential Fuel Cells

Individuals can claim a tax credit for 30% of the cost of qualified residential fuel cell property, up to a maximum credit of $500 for each 500 watts of installed capacity.

Business Fuels Cells and Microturbines

In order to qualify for this credit, the fuel cells must have at least a 500 watt capacity, with a generation efficiency of 30% or more.  The tax credit for fuel cells is 30% of the cost, up to a maximum of $500 per 500 watts of capacity.

Microturbines must have a 2,000 kilowatt capacity or less, with an efficiency of 26% at International Standards Organization (ISO) conditions.  The tax credit for microturbines is 10% of the cost up to a maximum credit of $200 per kilowatt.

Alternative Vehicles and Fuels

There are also tax credits available for vehicles that use alternative fuel sources or that are more fuel-efficient.  These include:

• New qualified fuel cell motor vehicle credit,
• New advance lean burn technology motor vehicle credit,
• New qualified hybrid motor vehicle credit,
• New qualified alternative fuel motor vehicle credit.

In general, in order to qualify for these credits, the taxpayer must be the original user of the vehicle, and the vehicle must be acquired for the taxpayer’s use or lease, and not for resale.

Fuel Cell Vehicles

A base credit of $8,000 can be taken on new qualified fuel cell motor vehicles (hydrogen-powered vehicles) weighing up to 8,500 lbs.  Vehicles weighing from 8,500 to 14,000 lbs. are eligible for a $10,000 credit.  Larger credits are available for heavier vehicles. For automobiles or light trucks weighing up to 8,500 lbs., there is an additional credit for vehicles that are more fuel-efficient than 2002 models.  The amount of the credit increases with the percentage increase in efficiency over the 2002 model year city fuel economy according to a table based on the vehicle inertia weight class.  For example, there is an additional $1,000 credit if the vehicle achieves at least 150% but less than 175% of the 2002 fuel economy.  This range of additional credits extends up to $4,000 if the vehicle achieves at least 300% of the 2002 fuel economy. 

Lean Burn Vehicles

The tax credit for advanced lean burn vehicles is from $400 up to $2,400, according to a table that specifies ranges of percentages by which the fuel economy of the vehicle exceeds the 2002 model year city vehicle fuel economy, as determined by the Environmental Protection Agency.

The aforementioned credit, based on comparatively better fuel economy, is supplemented by a conservation credit of from $250 to $1,000, according to a table based on lifetime fuel savings expressed in terms of gallons of gasoline.  For example, to qualify for the maximum conservation credit of $1,000, the vehicle would need to have a lifetime fuel savings of at least 3,000 gallons of gasoline. 

Hybrid Vehicles

Taxpayers who purchase gas-electric hybrid vehicles, which combine an rechargeable energy storage system with an internal combustion or heat engine, may be eligible for a tax credit.  For cars and light trucks weighing less than 8,500 lbs., the credit can be up to $3,400 and depends on how the vehicle’s fuel efficiency compares to 2002 models, and on the vehicle’s estimated lifetime fuel savings, as in the case with the credit for fuel cell vehicles.  This credit replaces the deduction that was previously allowed for hybrid vehicles.  There is a phase-out of this credit after an automaker has sold 60,000 units.  So, the amount of time the maximum credit can be taken will depend on how quickly the automaker produces and sells its quota of hybrid vehicles qualifying for the tax incentive.

Alternative Fuels

A tax credit is allowed for new qualified alternative fuel vehicles.  Alternative fuels include compressed or liquefied natural gas, hydrogen, or any liquid fuel that is at least 85 percent methanol.  The tax credit is calculated as the applicable percentage of the incremental cost of the qualified alternative fuel vehicle.  The incremental cost is the excess of the manufacturer’s suggested retail price for the qualified alternative fuel vehicle over the price for a gasoline or diesel-powered vehicle of the same model.  The incremental amount that is allowed for purposes of calculating the credit is limited based on the weight of the vehicle.  For example, the maximum incremental cost for a vehicle weighing less than 8,500 lbs. is $5,000.  The applicable percentage is 50% plus another 30%, depending on whether certain air emission standards are met.

Alternative Fuel Vehicles Refueling Properties

A tax credit can be taken for 30% of the cost of refueling properties for vehicles that use alternative fuels, up to a maximum credit of $30,000.  The refueling property must be placed in service during the year at the taxpayer’s trade or business location or principal residence.

Qualifying alternative fuels include those of which at least 85% by volume consists of ethanol, natural gas, compressed natural gas, liquefied petroleum gas, and hydrogen.  Or the alternative fuel can be a mixture of biodiesel and diesel fuel, with at least 20% being biodiesel.