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Federal Income Tax Credits for Going Green

Updated on October 16, 2012
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The American Recovery and Reinvestment Act provided two tax incentives for taxpayers when they invest in energy-efficient products for their home.

“Going Green” in the taxable terms means taxpayers adopted environmental practices that help save energy or re-use certain recyclable material. Taxpayers who are homeowners are attracted to the “going green” concept because they can incorporate the environmentally friendly systems in their homes and not worry about the high costs of installation thanks to the tax incentives. These incentives are subject to change, but often fall into several categories.

Nonbusiness Energy Property Credit. ”Homeowners can receive a credit rate of ten percent of the cost of qualified efficient improvements. These improvements include things such as; insulation, new energy efficient windows, doors, some roofs, and furnaces,” as stated by the IRS. There is a lifetime limit of $500 on the credit, only $200 of which can be used for windows. Sadly, the labor cost does not count toward the total cost of the item.

If the homeowner put in a high efficiency heating and cooling system, water heater, or a stove that burns biomass fuel, then and only then is the labor cost included in the total purchase price for the credit.

Residential Energy Efficient Property Credit. This credit equals thirty percent of the cost of what the homeowner paid for a “solar electric system, solar hot water heater, geothermal heat pumps, wind turbines, and fuel cell property,” as listed by the IRS. There is no cap for the amount of credit. Labor costs can be included in the total purchase price for the credit.

Either of these credits will be reported on Form 5695 Residential Energy Credits to be filed with the Form 1040 income tax return.

Not all energy-efficient home improvements will qualify for these tax credits. Taxpayers will need to check the manufacturer’s tax credit certification statement prior to purchase. Homebuyers can find this information on the website or product packaging.

Credits are not the only source of “money-back” reasons for going green. Exemptions are alternatives to tax credits. Exemptions allow homeowners to exempt certain green items like solar systems from taxes completely. When it comes to exemptions, taxpayers are usually given the choice of credit or exemption. Taxpayers should pick the one that offers them the best tax benefit.

If you have any questions you can contact your local IRS office or visit the website at IRS.gov

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