Federal Tax Credits for Energy Efficiency

The Energy Policy Act of 2005 includes:

A tax credit can provide significant savings. It reduces the amount of income tax you have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces the tax itself. You must refer to the final Internal Revenue Service (IRS) rules to determine what qualifies for the tax credit.

Please note, not all ENERGY STAR qualified homes and products qualify for a tax credit. These tax credits are available for a number of products at the highest efficiency levels, which typically cost much more than standard products. If, for whatever reason, you decide not to purchase a product covered by the tax credit, you may still consider purchasing an ENERGY STAR product. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit.

Tax Credits for Consumers:

Home Improvements
The Internal Revenue Service (IRS) has provided guidance for consumers: IRS Notice 2006-27

Tax credits are available for many types of home improvements including adding insulation, replacement windows, and certain high efficiency heating and cooling equipment. See chart. The maximum amount of homeowner credit for all improvements combined is $500 during the two year period of the tax credit. This tax credit applies to improvements made from January 1, 2006 through December 31, 2007.

If you are building a new home, you do not qualify for the tax credits for "eligible building envelope components" (windows, doors, insulation, roofs) or "qualified energy property" (HVAC & non-solar water heaters). However, the tax credit for photovoltaics, solar water heating, and fuel cells is available for homeowners building new homes.

Efficient Cars
Tax credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles. The tax credit amount is based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models. These credits are available for vehicles placed in service starting January 1, 2006. For hybrid and diesel vehicles made by each manufacturer, the credit will be phased out over 15 months starting after that manufacturer has sold 60,000 eligible vehicles. For vehicles made by manufacturers that have not reached the end of the phase-out, the credits will end for vehicles placed in service after December 31, 2010.See the IRS Website for updated information.

Solar Energy Systems
Tax credits are available for qualified solar water heating and photovoltaic systems. The credits are available for systems "placed in service"from January 1, 2006 through December 31, 2008. The tax credit is for 30% of the cost of the system, up to $2,000. This credit is not limited to the $500 home improvement cap.

Fuel Cells
There is a consumer tax credit of up to 30% of the cost (up to $500 per 0.5 kW of capacity maximum) for installing a "qualified" fuel cell and microturbine systems. The credits are available for systems "placed in service" from January 1, 2006 through December 31, 2008. This credit is not limited to the $500 home improvement cap.

ENERGY POLICY ACT OF 2005 — SUMMARY OF TAX CREDITS FOR HOMEOWNERS

Product Category	Product Type	Tax Credit Specification	Tax Credit	Notes
Windows & Doors	Exterior Windows and Skylights	ENERGY STAR qualified OR meets IECC¹	10% of cost, up to $200² for all windows, skylights and storm windows	All ENERGY STAR labeled windows and skylights qualify for tax credit. Installation costs are not included. Learn more about ENERGY STAR qualified windows and skylights. Installation costs are not included. For tax purposes, save your receipt and either the ENERGY STAR label from all your new windows OR the Manufacturer's Certification Statement.
	Storm Windows	Meets IECC¹ in combination with the exterior window over which it is installed, for the applicable climate zone	10% of cost, up to $200² for all windows, skylights and storm windows	Manufacturer Certification Statement³ will list classes of exterior window (single pane, clear glass, double pane, low-E coating, etc.)⁴ that a product may be combined with to be eligible in specific climate zones. Installation costs are not included. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement. Use IRS Form 5695
	Exterior Doors	Meets IECC¹	10% of cost, up to $500²	ENERGY STAR doors will almost always qualify, except for certain parts of California4. Installation costs are not included. Learn more about ENERGY STAR qualified doors. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
	Storm Doors	In combination with a wood door assigned a default U-factor by the IECC¹, and does not exceed the default U-factor requirement assigned to such combination by the IECC	10% of cost, up to $500²	Eligibility will be confirmed by manufacturer and documented in the Manufacturer Certification Statement³ Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
Roofing	Metal Roofs	ENERGY STAR qualified	10% of cost, up to $500²	All ENERGY STAR labeled metal roofs qualify for the tax credit. Must be expected to last 5 years OR have a 2 year warranty. Installation costs are not included. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
Insulation	Insulation	Meets 2000 IECC & Amendments	10% of cost, up to $500²	For insulation to qualify, its primary purpose must be to insulate. (example: vapor retarders are covered, siding does not qualify). Must be expected to last 5 years OR have a 2 year warranty Installation costs are not included. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
HVAC	Central A/C	EER 12.5/SEER 15 Split Systems EER 12/SEER 14 Package systems	$300²	For a list of qualified products, go to the Consortium for Energy Efficiency product directory, click on the Air Conditioners and in the "CEE Tier" enter "Residential Tier 2." Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is: EER 11.5/ SEER 14 Split systems EER 11/SEER 14 Package systems Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
	Air Source Heat Pumps	HSPF 9 EER 13 SEER 15	$300²	Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is: HSPF 8.2 EER 11.5 SEER 14 Split systems HSPF 8 EER 11 SEER 14 Package systems Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
	Geo-Thermal Heat Pump	Same criteria as ENERGY STAR: EER 14.1 COP 3.3 Closed Loop EER 16.2 COP 3.6 Open Loop EER 15 COP 3.5 Direct Expansion	$300²	All ENERGY STAR labeled geo-thermal heat pumps qualify for the tax credit. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
	Gas, Oil, Propane Furnace or Hot Water Boiler	AFUE 95 for both furnaces and boilers	$150²	For a list of qualifying products go to the Gas Appliance Manufacturing Association Note - not all ENERGY STAR products will qualify for the tax credit. The ENERGY STAR specification is: AFUE 90 for furnaces AFUE 85 for boilers Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
	Advanced Main Air Circulating Fan	No more than 2% of furnace total energy use	$50²	For a partial list of qualifying products go to the Gas Appliance Manufacturing Association Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
Water Heaters	Gas, Oil, Propane Water Heater	Energy Factor 0.80	$300²	Only some tankless water heaters currently qualify. This is over 33 percent more efficient than the current federal standard. For a partial list of qualifying products go to the Gas Appliance Manufacturing Association. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
Water Heaters	Electric Heat Pump Water Heater	Energy Factor 2.0	$300²	This is more than twice as efficient as the current federal standard. Manufacturer's Certification Statement³ required. For tax purposes, save your receipt and the Manufacturer's Certification Statement.
Cars	Cars	Hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles	Based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models	Guidance for auto manufacturers is available from IRS. There is a 60,000 vehicle limit per manufacturer before a phase-out period begins. Consumers who buy from companies that already sell large numbers of qualifying vehicles will experience a relatively short "window of opportunity" for the credits.
Solar Energy Systems	Solar Water Heating	At least half of the energy generated by the "qualifying property" must come from the sun. Homeowners may only claim spending on the solar water heating system property, not the entire water heating system of the household. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. The system must be certified by the Solar Rating and Certification Corporation (SRCC).	30% of cost, up to $2,000
Solar Energy Systems	Photovoltaic Systems	Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.	30% of cost, up to $2,000
Fuel Cells	Fuel Cells	Efficiency of at least 30% and must have a capacity of at least 0.5 kW.	30% of the cost, up to $1000 per kW of power that can be produced

1Either the 2001 Supplement of the 2000 International Energy Conservation Code or the 2004 Supplement of the 2003 International Energy Conservation Code.
2Subject to a $500 maximum per homeowner for all improvements combined.
3A Manufacturer's Certification is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. The IRS encourages manufacturers to provide these Certifications on their website to facilitate identification of qualified products. Taxpayers must keep a copy of the certification statement for their records, but do not have to submit a copy with their tax return.
4Additional information on exterior window features may be viewed at Anatomy of an Energy Efficient Window.

Tax Credits for Home Builders:

The Internal Revenue Service (IRS) has provided the following guidance regarding the tax credits for constructing energy efficient new homes available under the Energy Policy Act of 2005:

IRS Notice 2006-27 provides guidance for the credit for building energy efficient homes other than manufactured homes.
IRS Notice 2006-28 provides guidance for the credit for building energy efficient manufactured homes.

The tax credit information provided below is based on information contained in the Energy Policy Act of 2005. The IRS guidance provides specific information that home builders and housing manufacturers can rely on to take action to claim the tax credits. ENERGY STAR will study the IRS publications and provide updates as necessary.

Home builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50 percent energy savings for heating and cooling over the 2004 International Energy Conservation Code (IECC) and supplements. At least 1/5 of the energy savings must come from building envelope improvements. This credit also applies to contractors of manufactured homes conforming to Federal Manufactured Home Construction and Safety Standards.

There is also a $1,000 tax credit to the producer of a new manufactured home achieving 30 percent energy savings for heating and cooling over the 2004 IECC and supplements (at least 1/3 of the savings must come from building envelope improvements), or a manufactured home meeting the requirements established by EPA under the ENERGY STAR program.

Please note that, with the exception of the tax credit for an ENERGY STAR qualified manufactured home, these tax credits are not directly linked to ENERGY STAR. Therefore, a builder of an ENERGY STAR qualified home may be eligible for a tax credit but it is not guaranteed.

These tax credits apply to new homes located in the United States whose construction is substantially completed after August 8, 2005 and that are acquired from the eligible contractor after December 31, 2005 and before January 1, 2008, for use as a residence.

Tax Credits for Manufacturers:

While not directly affecting consumers, manufacturers of energy efficient clothes washers, dishwashers and refrigerators are eligible for tax breaks themselves, which may lead to increased availability and a reduction in prices for these energy-saving appliances:

ENERGY STAR qualified dishwashers that meet ENERGY STAR's 2007 specification.
ENERGY STAR qualified clothes washers that meet ENERGY STAR's 2007 specifications.
Refrigerators that are more efficient than 2001 federal energy conservation standards

Tax Deductions for Commercial Buildings:

A tax deduction of up to $1.80 per square foot is available to owners or designers of new or existing commercial buildings that save at least 50% of the heating and cooling energy of a building that meets ASHRAE Standard 90.1-2001. Partial deductions of up to $.60 per square foot can be taken for measures affecting any one of three building systems: the building envelope, lighting, or heating and cooling systems. These deductions are available for buildings or systems placed in service from January 1, 2006, through December 31, 2007.

IRS Notice 2006-52 (6/2/2006) provides guidance on deduction for energy efficient commercial buildings
IRS News Release on above notice
ENERGY STAR Brochure for Commercial Tax Deductions
Commercial Building Tax Deduction Coalition

For More Information:

Tax Incentives Assistance Project (TIAP)
Energy Bill