Although April 15, 2011, may seem far into the future, now is the time to reevaluate your home-improvement wish list. Certain projects undertaken this year could net major savings on your income taxes. This article will discuss certain tax credits expiring at the end of this year, including the up to $1,500 credit for energy efficient upgrades, the 30 percent credit for newly installed renewable energy systems, the credit for hybrid vehicles, as well as links to Minnesota and Wisconsin websites outlining additional credits and rebates available.
Energy Efficiency - Home
Homeowners can take advantage of a tax credit, up to $1,500, for purchasing and installing certain energy efficient products during 2010.
This tax credit comes courtesy of the American Recovery and Reinvestment Act of 2009, more commonly known as the stimulus package. Qualifying products for this tax credit that are purchased and installed on or before Dec. 31 include:
Exterior windows and skylights.
Exterior and storm doors.
Metal or asphalt roofs.
Central air conditioning.
Advanced main air circulating fan.
Air source heat pump.
Natural gas, oil, or propane furnace.
Natural gas, oil, or propane boiler.
Gas, oil, propane, or electric heat pump water heater.
Generally speaking, a tax credit is more valuable than a deduction because a credit reduces the amount of tax you pay instead of reducing the amount of income that is taxed. In other words, a tax credit reduces the amount of tax you owe on a dollar-for-dollar basis.
Claiming the Tax Credit
In order to claim this tax credit, however, there are a few items you should know:
The credit only applies to qualifying improvements placed in service before Jan. 1, 2011. This means that if you wait until Dec. 31 to pick up a new exterior door or some windows, you will have to install them before running off to your New Years Eve party if you want to claim the credit on your 2010 taxes.
In most cases, the improvement must be performed on your principal residence. This means second homes and rental properties do not qualify. (The Residential Energy Efficient Property Credit, discussed later, does not have this restriction.)
The tax credit does not cover installation costs for qualifying insulation, windows, doors or roofs. To save yourself a headache at tax time, ask the professional installer for an itemized bill that separates out qualifying product costs from installation costs. Installation costs for air conditioning and heating systems, however, are included for purposes of calculating the credit.
The tax credit is for 30 percent of the cost, up to $1,500. This means that you will need to spend $5,000 on qualifying products in order to claim the full $1,500 tax credit (30 percent of $5,000 = $1,500). However, if less than 80 percent of the use of an item is for non-business purposes, only the portion of the cost allocable to the non-business use may be used to claim the credit.
The credit is not refundable. This means that if you owe less income tax than what your credit is worth, you will not be refunded the difference. If you do not owe income taxes, this credit does not benefit you.
If you already claimed the maximum $1,500 credit on last year's return, you cannot claim it this year. The $1,500 credit is good for qualifying improvements made in 2009 and 2010. Thus, if you made improvements last year and already claimed $1,000 of the credit, you would still be eligible to claim ($1,500 - $1,000 =) $500 on your income taxes for 2010. If you took advantage of the previous $500 lifetime credit in 2006 or 2007, you can still claim up to $1,500 for 2009 and 2010.
To claim the credit, use Form 5695 along with your 1040 for 2010. For a sample form, visit www.irs.gov.
Residential Energy Efficient Property Credit
For those interested in making more ambitious energy improvements, such as installing solar energy systems (including solar water heating and solar electric systems), wind power or geothermal systems, you have through Dec. 31, 2016.
These home energy upgrades can qualify for a tax credit equal to 30 percent of the cost, including installation. The advantage of this credit is that the installation does not need to be at your principal residence. For more information on the credit for Residential Energy Efficient Property, please see Notice 2009-41 at www.irs.gov.
Minnesota Small Wind Turbine Rebate
Minnesota currently offers a 35 percent rebate (up to $10,000) for a small wind turbine system installed at a primary residence within the state. This rebate is funded by the American Recovery and Reinvestment Act of 2009 and is offered on a first come, first serve basis. It is recommended that you contact the Minnesota Office of Energy Security to reserve your rebate before undertaking your project. For additional information, please go to www.energy.mn.gov.
State Programs and Local Utility Incentives
Minnesota and Wisconsin both offer dedicated websites that serve as a one-stop shop for information on incentives available for home energy improvements. These sites provide useful tips and links to available federal, state and local incentive programs.
In Wisconsin, the Focus on Energy program provides this information and can be found at www.focusonenergy.com. Similarly, in Minnesota, the Office of Energy Security provides this information. For more information, please go to www.energy.mn.gov. Information can also be retrieved through your local utility company.
Expiring Hybrid Auto Tax Credit
There is still time, but also expiring at the end of this year is a credit for individuals or businesses that buy or lease new hybrid gas-electric cars or trucks. Although purchasing a new vehicle is not a home-improvement, it is worth mentioning since it is the second largest purchase a person generally makes.
To qualify for the credit, the vehicle must be placed in service by Dec. 31. According to the IRS, Chevrolet, GMC, Cadillac, Nissan, BMW, and Mercedes-Benz still have 2010 models eligible for the full credit. If, however, you were hoping to get a tax credit for a new Ford or Toyota hybrid, you are out of luck. The tax credit for qualifying models is gradually phased out once 60,000 of an eligible vehicle has been sold.
If you plan to make a purchase yet this year, it is recommended that you visit www.irs.gov and review the list of remaining eligible vehicles and the associated credit available for a particular model.
Hopefully, this article will start you thinking about ways to lighten your obligation. As Benjamin Franklin once said, A penny saved is a penny earned. Taking advantage of tax credits now, before they expire, will help keep money in your pocket.
Christopher J. Virta is an attorney in the Duluth office, practicing in the areas of corporate, municipal and real estate law. Neal J. Hessen has been practicing law in Duluth for 36 years, focusing on real estate, administrative, governmental, business, banking and tax law. Both attorneys can be reached at 218-722-0861 or via www.fryberger.com.