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Lower Your Taxes by Cleaning up the Environment

| May 29, 2013
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As the single largest housing expense after a mortgage payment, utilities are a significant cost to home ownership. You can save money on the cost of utilities by purchasing new energy-efficient heating and cooling systems or by making home improvements, such as weatherizing and insulating older homes and these investments can end up saving you money through lower utility bills.

This year, several tax incentives were extended and changed through the American Taxpayer Relief Act of 2012, also known as the “Fiscal Cliff Bill,” which passed Tuesday, Jan. 1, 2013. These tax credits were all geared towards more energy efficient homes and all offered tax credits to eligible homeowners and homebuyers who made the specific improvement.

The first of these tax credit extensions was the “Energy Efficient Mortgage Credit,” (EEM). Overseen by the Federal Housing Administration, the EEM tax credit allow homebuyers, or current home owners, to finance the purchase of a home or refinance your current mortgage and include the cost of the energy-saving, cost-efficient improvements through a single mortgage. This is a personal tax credit that can be used towards energy efficient technologies such as water heaters, furnaces, boilers, heat pumps, central air conditioners, building insulation, windows, roofs, and circulation fans used in a qualifying furnace. Borrowers may use the EEM program to finance the cost of energy efficient improvements into their new mortgages, without the need to qualify for additional financing, because cost effective energy improvements result in lower utility bills making more funds available for their mortgage payments. The tax credit is now 10% of the cost of building improvements made, excluding the cost of labor.1

However, in addition to the tax credit itself, home owners/buyers can also expect to recognize substantial utility cost savings once the energy efficient improvements are made. There is a cap on this credit amount of $500 for fiscal years 2006 through 2013 combined; if you have ever claimed this credit in the past, it counts against the $500 limit (but does not affect the $1500 limit available for 2009 and 2010). So, for example, if you claimed $300 in 2007, you can only claim $200 in 2012; if you claimed $800 in 2009, you cannot claim any more credit.

Also, one must note that there are some very specific “energy efficiency” requirements for each of the items. Not every new window, door, boiler, furnace, heater or roofing improvement will qualify. You can go to the Energy Star’s website to find out what the specific qualifications are for the individual items.

The second tax credit extension was the Residential Renewable Energy Tax Credit. Although originally created for the promotion of solar-electric systems, water heating systems, and fuel cells, the extension now includes small wind energy systems and geothermal heat pumps as well. The full list of technologies include, solar water heat, photovoltaic, wind, fuel cells, geothermal heat pumps, fuel cells using renewable fuels, and other solar-electric technologies.

The credit for these technologies has remained unchanged since its original conception in 2006 of 30% of installed cost for systems placed in service by December 31st 2016. Currently there is no maximum credit for many of the technologies, if placed in service after 2008.2 In order for installed systems to meet tax credit qualifications they must meet federal Energy Star criteria.

  1. This is limited to a specific dollar amount for windows, and heating and cooling devices.
  2. Applies primarily to the majority of solar-electric and geothermal technologies. Wind and fuel cell technologies have different maximum credits depending on a variety of different factors and efficiencies.
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