Residential Energy Credits for Tax Year 2006

On August 8, 2005, President Bush signed into law the "Energy Incentives Act of 2005", which is designed to promote domestic energy production and conservation. The act addresses four major areas:

1. Conservation,

2. Alternative energy,

3. Energy infrastructure, and

4. Domestic energy production.

This new bill is aimed at providing incentives to energy producers, business owners and manufacturers of energy-efficient consumer goods. However, there are a several tax breaks for consumers who purchase or install energy efficient products in their homes.

Energy Efficient Home Improvements

The bill creates a new personal tax credit for individuals for the purchase of certain energy efficient property installed in their principal residence. The credit will be available for property placed in service after December 31, 2005 and before January 1, 2008. The tax credit cannot be greater than $500 and is available to individuals for nonbusiness energy property, such as residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters.

The credit is equal to:

1. The residential energy property expenditures, plus

2. 10% of the cost of qualified energy efficiency improvements installed during the year at the taxpayer’s principal residence in the United States.

The residential energy property credit is limited to a maximum of $500 for all tax years and no more than $200 of the credit can be based on expenditures for windows.

Eligible improvements include:

• Insulation materials

• Exterior windows (including certain storm windows and skylights)

• Exterior doors (including certain storm doors)

• Metal roofs with special pigmented coatings

• Electric heat pump water heaters

• Electric and geothermal heat pumps

• Central air conditioners

• Natural gas, propane, or oil water heaters or furnaces

• Hot water boilers

• Advanced main air circulating fans.

The residential energy property credit is a $500 lifetime credit. The credit is equal to 10% of the cost of qualified energy efficiency improvements (windows, doors, insulation) plus the cost of qualified energy property (heat pumps, water heaters, furnaces, central air units) up to the $500 lifetime maximum, subject to the following specific credit amount limits:

• $200 for window components

• $50 for an advanced main air circulating fan

• $150 for any qualified natural gas, propane, or oil furnace or hot water boiler

• $300 for any item of energy efficient building property

The energy-efficient property must be expected to remain in use for at least 5 years. The nonrefundable credit reduces the basis of the property and unused credits cannot be carried forward. The credit is not available for vacation homes or residential rental property.

Credit for Solar and Fuel Cell Equipment Installed on a Personal Residence

A tax credit is available to help individual taxpayers pay for residential alternative energy equipment. The residential alternative energy credit is 30% of the cost of eligible solar water heaters, solar electricity equipment (photovoltaics) and fuel cell plants.

The maximum credit is $2,000 per tax year for each category of solar equipment, and $500 for each half kilowatt of capacity of fuel cell plants installed per tax year.

Cooperative and condominium dwellers can claim the credit by splitting the cost of installing equipment with other unit owners.

Eligible equipment must be placed in service after December 31, 2005, and before January 1, 2008.

The residential alternative energy credit is a nonrefundable personal credit. It can be used to offset the excess of the individual’s regular tax liability over any alternative minimum tax liability, but cannot be used to get a refund if the tax liability drops below zero. Unused credits may be carried forward and added to a residential alternative energy credit for the succeeding tax year.

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