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Deciphering the Tax Credits

Make sure you understand the tax credit rules before contracting for energy-efficiency improvements

Posted on Oct 30 2009 by Martin Holladay, GBA Advisor

The energy-efficiency tax credits and renewable-energy tax credits are better than tax deductions. The allowable credits aren’t just deductible expenses; they represent dollars subtracted directly from your tax bill. While the tax credit program includes illogical rules, the available tax credits can be significant.

If you want to claim a tax credit on your 2009 income tax return for energy-efficiency improvements to your home, you should get the improvements installed before the end of the year. There’s really no need to rush, however, since the tax credits will remain available until the end of 2010 — or, in some cases, 2016.

Energy-Efficiency Credits
The energy-efficiency tax credits are available for air-sealing products, insulation, HVAC equipment, water heaters, windows, doors, and roofing. These tax credits were established on February 17, 2009 by the American Recovery and Reinvestment Act — President Obama’s stimulus bill.

The following rules apply to the energy-efficiency tax credits:

  • The credits are available to homeowners.
  • The credits apply to improvements made to an existing home; new homes are not eligible. The home must be the taxpayer’s primary residence, not a vacation home or rental property.
  • The value of the credit is 30% of the cost of the installed materials. For some but not all categories of materials, a credit can also be claimed for 30% of the cost of the installation labor.
  • The maximum tax credit available is $1,500 per homeowner; this cap is the combined total of all energy-efficiency tax credits claimed in 2009 and 2010. For example, if you claim a $1,000 credit for a furnace and a $500 credit for windows, you’ve maxed out your available credits.
  • The credit is set to expire on December 21, 2010.

No tax credits are available for energy-efficiency improvements made in 2008. An earlier tax credit program (with different criteria) was available in 2006 and 2007; tax credits received for improvements in 2006 and 2007 are not counted towards the $1,500 limit on tax credits for 2009 and 2010 improvements.

Renewable-Energy Credits
The renewable-energy tax credits — credits for solar hot water systems, solar electric systems, ground-source heat pumps, wind turbines, and fuel cells — are separate from the energy-efficiency tax credits, and have different rules:

  • The renewable-energy tax credits are available for equipment installed at second or third homes as well as primary residences. New homes as well as existing homes are eligible for the credits.
  • Taxpayers can claim a tax credit for 30% of the installed cost, including labor, of renewable energy equipment. There is no upper limit to the size of the credit.
  • The renewable-energy tax credits will be available through the end of 2016.

The Most Bang For Your Buck
If you’re interested in making your home more energy efficient, and maybe claiming a tax credit while you’re at it, where should you start?

For most homeowners, the first step should be a home energy audit. Ideally, this audit should be performed by an experienced RESNET-certified or BPI-certified home performance auditor equipped with a blower door. Unfortunately, no federal tax credits are available to cover any portion of the cost of a home energy audit. (For more information on blower-door testing, see "Blower Door Basics.")

An energy audit report will include a list of recommended measures for lowering your energy costs. While this list of measures will vary from climate to climate and house to house, it’s possible to make a few generalizations about the most cost-effective measures. If we limit our examination to measures that are eligible for a tax credit, three improvements come to the top of the list: air sealing; adding insulation; and replacing heating or cooling equipment.

Measure Number One: Air sealing
In almost all existing homes, the first energy-efficiency measure to perform should be air sealing.

Air sealing is best performed by a contractor equipped with a blower door. Typical areas that require air sealing include basement rim joists, the crack below baseboards on exterior walls, kitchen soffits, fireplace bump-outs, utility chases, ceiling plumbing penetrations, ceiling can lights, and the cracks between partition drywall and partition top plates. In most cases, the existing attic access hatch will require new weatherstripping.

Unfortunately, a tax credit only covers 30% of the cost of air-sealing materials (for example, caulk, canned spray foam, and weatherstripping). No tax credit is available for air-sealing labor — in spite of the fact that about 80% to 90% of the cost of air-sealing work is likely to be labor, not materials. It is unfortunate indeed that the tax-credit program is so stingy when it comes to air sealing, which is by far the most important energy-efficiency measure for most existing houses.

Resist the temptation to do your own air-sealing work — unless, of course, you own a blower door and are familiar with weatherization techniques. Most people’s intuitions about the most important areas for caulking and sealing are mistaken. To find the hidden thermal bypasses that are most responsible for robbing your home’s heat, you really need a blower door.

Measure Number Two: Insulation
A tax credit is available for 30% of the cost of insulation, but not for the labor required to install it. To be eligible for the tax credit, enough insulation must be installed to meet the meet the requirements of the 2009 International Energy Conservation Code (IECC).

This means that total ceiling R-values must be at least R-49 in climate zones 6-8; at least R-38 in zones 4-5; and at least R-30 in zones 1-3. (Click here to find your state on the climate zone map.)

Claiming a credit for wall insulation will usually be harder than for attic insulation, especially in cold climates, where most walls aren’t thick enough to accommodate enough dense-packed cellulose (R-3.6 per in.) to meet the minimum R-values required. If you want to give it a try, here are the minimum requirements: R-21 in zones 7-8; R-20 in zones 5-6; and R-13 in zones 1-4. (An alternative compliance path in zones 5 and 6 would be R-5 exterior foam sheathing plus R-13 wall insulation.)

Basement walls should be insulated with rigid foam, not fiberglass batts. To claim the tax credit, basement wall insulation must be at least R-15 (3 in. of extruded polystyrene, or XPS) in zones 6-8, R-10 (2 in. of XPS) in zones 4-5, and R-5 (1 in. of XPS) in zone 3. No basement wall tax credit is available for zones 1-2.

Measure Number Three: Replace your furnace, boiler, air-source heat pump, air conditioner, wood stove, or water heater. If your heating or cooling equipment is at least 15 or 20 years old, it may make economic sense to upgrade to more efficient equipment.

A tax credit is available for 30% of the cost to install new equipment complying with certain minimum efficiency standards. The tax credit for HVAC equipment is more generous than the tax credit for insulation or air-sealing materials, since both labor and materials are included in the HVAC credit calculation.

To be eligible for a tax credit:

  • A gas furnace must have a minimum AFUE of 95%.
  • An oil furnace must have a minimum AFUE of 90%
  • A gas or oil boiler must have a minimum AFUE of 90%.
  • An air-source heat pump must have a minimum HSPF of 8.5 and a minimum EER of 12.5.
  • An air conditioner must have a minimum SEER of 16 and a minimum EER of 13.
  • A wood stove or pellet stove must have a minimum efficiency rating of 75% when tested according to the “low-heat-value protocol” testing method. More information on qualifying wood stove models is available from stove manufacturers.
  • A gas water heater must have a minimum Energy Factor (EF) of 82% or a minimum thermal efficiency of 90%.
  • A heat-pump water heater must be Energy Star rated.

Unlikely To Yield an Economic Return, But Worth Considering
Once the above measures are dealt with, the remaining tax credit items fall much lower down on the priority list, since they rarely make economic sense.

Although many homeowners assume that installing replacement windows will save them money, window replacement is almost never cost-effective. In other words, it will take between 40 and 100 years to save enough energy to justify window replacement.

Furthermore, tax credits are only available for windows with low-solar-gain (hot climate) glazing. Mysteriously, the best glazing option for cold climates (high-solar-gain glazing) is not eligible for tax credits.

The most likely candidates for the tax credit are hot-climate homeowners or cold-climate homeowners replacing windows on the east or west sides of their homes. To be eligible for the tax credit, windows installed after June 1, 2009 must be NFRC-rated, and must have a maximum U-factor of 0.30 and a maximum solar heat gain coefficient (SHGC) of 0.30. The value of the tax credit is 30% of the cost of the windows; installation labor cannot be included in the calculation.

Because of delays in establishing the so-called “30/30” standard, windows installed between January 1, 2009 and May 31, 2009 must meet different criteria; they are eligible for the 30% tax credit as long as they are Energy Star rated.

Federal legislators are currently considering a bill that would change the criteria for the window-replacement tax credit. To learn more about the bill, see “Tying the Window-Purchase Tax Credit to Energy Star.”

Ground-Source Heat Pumps and Solar Hot Water Systems
In the same category — “unlikely to yield an economic return, but worth considering” — are ground-source heat pumps and solar hot water systems. To be eligible, a ground-source heat pump must be Energy Star rated.

Among the rules governing the solar-hot-water tax credit:

  • The solar thermal system must be designed to supply at least half the home’s hot water needs.
  • The credit applies to equipment that is part of the solar thermal system, but not the backup water heater.
  • Solar water heaters for swimming pools or hot tubs are not eligible.
  • To be eligible, solar collectors must be certified by the Solar Rating and Certification Corporation.

The value of the tax credit is 30% of the installed cost (including labor) of an eligible solar thermal system or ground-source heat pump. There is no upper limit to the credit.

Not Worth Replacing Unless They’re Worn Out Anyway
Working our way down the tax-credit list, we come to items with longer and longer payback periods. These include roofing and exterior doors.

To be eligible for the tax credit, roofing must be have a high solar reflectance and must be Energy Star rated. Only two types of roofing qualify: Energy Star rated asphalt shingles and Energy Star rated metal roofing.

These so-called “cool roofing” products should only be installed in hot climates. In cold Northern climates, cool roofing can actually contribute to higher heating bills.

Surprisingly, even the Environmental Protection Agency (EPA) is uncertain about the requirements for obtaining this tax credit. According to the Energy Star Web site, “Unfortunately, a simple list of all roofs that qualify for the tax credit does not exist. There are many metal and asphalt (either shingles or ‘modified bitumen’) roofs listed on the Energy Star qualified product list. EPA can not confirm that these Energy Star qualified roofs are eligible for the tax credit.”

The value of the “cool roofing” tax credit is 30% of the cost of the materials; installation labor cannot be included in the tax-credit calculation.

Exterior Doors
In most cases, replacing an exterior door is not a cost-effective energy retrofit measure. If you need a new door, however, you might as well grab the tax credit.

Eligible doors include steel doors with polyurethane foam cores. To be eligible, an exterior door must have a maximum U-factor of 0.30. Solid-core wood doors, traditional frame-and-panel doors, and doors that are mostly glass are unlikely to have a low enough U-factor to earn this credit.

No Bang For the Buck
Now we’re down to the items that fall to the bottom of the list. Investing in these measures may reduce your carbon footprint, but they won’t save you any money.

These measures include:

  • Solar electric systems. To be eligible, a solar electric (photovoltaic) system must provide electricity for a residence used by the taxpayer.
  • Wind turbines. Wind turbines rated at 100 kW or less are eligible.
  • Fuel cells. It may be hard to find equipment that meets this requirement, but if you do, here are the criteria: the fuel cell must have a minimum efficiency of 30% and a minimum capacity of 0.5 kW.
  • The Curious Case of Storm Windows
    In cold climates, storm windows (especially hard-coat low-e storm windows) are a cost-effective energy retrofit measure. While storm windows are eligible for a tax credit, the criteria are so poorly crafted that it is unlikely that anyone will be able to claim the credit.

    Inexplicably, the tax credit program only awards tax credits for installations that aren’t cost-effective; cost-effective storm windows are excluded from the program.

    To be eligible for a tax credit, a storm window must, in combination with the existing window over which it is installed, have a maximum U-factor of 0.30.

    Storm windows installed over existing single-glazed windows — the most cost-effective installation — are not eligible, since even low-e storms result in a combined U-factor of 0.50 to 0.54 — too high for a tax credit.

    Storm windows installed over existing double-glazed windows may qualify; however, it doesn’t make economic sense to install a storm window over double-glazed windows.

    More and More Peculiar
    After wading through the details of the tax-credit programs, one begins to wonder if there were any adults in the room when the programs’ rules were crafted. Clearly, Federal legislators were more interested in satisfying the lobbyists of equipment manufacturers than in encouraging energy conservation.

    Among the obvious questions raised by the peculiar rules of the program:

    • Why is there no tax credit for the labor associated with blower-door-directed air sealing — by far the most cost-effective energy retrofit measure?
    • Why is there no tax credit for sealing ducts?
    • Why are high-solar-gain replacement windows excluded from the program?
    • Why are cost-effective storm window installations excluded from the program?
    • Why provide thousands of dollars for PV systems and ground-source heat pumps, and only a few (or no) dollars for more cost-effective measures?

    If You Want the Credits, Don’t Forget…
    When it’s time to fill out your tax forms, you’ll need to get a copy of IRS Form 5695 to claim your tax credit.

    To be prepared for a possible tax audit, remember to file away receipts that show the cost of the work performed. Remember to tell your contractor that in most cases the invoices must separate labor costs from materials costs.


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  1. Martin Holladay

1.
Tue, 11/03/2009 - 08:50

BPI auditors are pretty good too
by Doug

Helpful? -1

Martin, excellent post as usual. Hopefully you are one of the adults in the room next time around!
Incidentally, there was a funny article in Window & Door magazine in which the reporters tried to figure out where the 30/30 window requirements came from. As you are probably aware, besides being completely wrong for the entire northern tier of the US, very few manufacturers could even produce such units when the policy was announced! Window & Door couldn't even find a 'smoking lobbyist' who had engineered the wacky policy to benefit their employer.
I wanted to mention that at least in the mid-Atlantic, RESNET raters are often only familiar with new home construction, and a better choice for retrofit audits (on existing houses) are Building Performance Institute-certified auditors. The BPI training specifically covers combustion safety & efficiency, which I view as a must-do procedure on a house with atmospherically-vented heaters. BPI training also does more on finding & evaluating existing house issues. RESNET auditors in our area usually lack these skills, though to be fair they tend to be better at modeling the energy use of a house, a weak spot in BPI's current training.
At the end of the day, an experienced, knowledgeable person can do a decent job with either system, but around here you would be remiss not to at least include BPI trained auditors in your recommendation, and I would argue that a RESNET auditor who doesn't do combustion safety analysis is not giving you a complete job.


2.
Tue, 11/03/2009 - 09:39

BPI-trained auditors
by Martin Holladay, GBA Advisor

Helpful? 1

Doug,
Thanks for making an important point. The Building Performance Institute (BPI) does an excellent job of training energy auditors, and I should have mentioned them.

Concerning the other issue you raised: Most attempts to assign blame for the 30/30 window criteria disaster have fingered Senator Olympia Snowe of Maine or her legislative aide, Patrick Woodcock. According to this article, Woodcock explained that "the final decisions regarding this [the 30/30 criteria] were made rather quickly at 3 o’clock in the morning as the legislation had to be finalized."


3.
Tue, 11/03/2009 - 15:57

what about the delivery system?
by brian fuentes

Helpful? 0

A client would like to know - One thing that still seems uncertain reading this is
whether the ducting/radiant-piping to allow the heat pump to heat the
house is included in the tax credit?


4.
Tue, 11/03/2009 - 16:10

Heat pump tax credit
by Martin Holladay, GBA Advisor

Helpful? 0

Brian,
The tax credit for air-source heat pumps applies to existing homes, not new homes. The tax credit can be claimed when a new heat pump is installed to replace an older model. As far as I can tell, the cost of the heat distribution system (under-floor tubing, baseboard radiators, or ductwork) is not eligible. In any case, these elements of a heating system are usually not changed when a heat pump is replaced.

The tax credit for ground-source heat pumps is a different program -- the renewable energy tax credit program. That program allows tax credits for new construction. I'm not sure if the distribution system is eligible -- I'll look into it.


5.
Wed, 11/04/2009 - 05:53

More on ground-source heat pumps
by Martin Holladay, GBA Advisor

Helpful? -1

Brian,
It appears that to be eligible for a tax credit, a ground-source heat pump must use ducts to distribute the heat, not in-floor radiant tubing. Here's the relevant information:
"Currently, water-to-water geothermal heat pumps can not qualify for the tax credit, because the law requires geothermal heat pumps to be ENERGY STAR qualified for the tax credit. Water-to-water units are not currently able to earn the ENERGY STAR. However, it's likely they will be eligible for both ENERGY STAR and the tax credit starting in December 2009.

EPA is in the process of revising the ENERGY STAR geothermal heat pump specification. Water-to-water geothermal heat pumps are included in the draft specification. If water-to-water models are included in the final specification, then the effective date for ENERGY STAR water-to-water geothermal heat pumps and tax credit eligibility will be the date this new specification is final."
http://energystar.custhelp.com/cgi-bin/energystar.cfg/php/enduser/std_ad...

I'm still trying to find out whether ductwork and air handlers are eligible for the ground-source heat pump tax credit. My instincts say they are not, but I haven't found the answer in black and white yet.


6.
Wed, 11/04/2009 - 05:58

Even the Energy Star Web site is vague
by Martin Holladay, GBA Advisor

Helpful? 0

Brian,
Okay, here's as close as I have come to an answer — and it's a vague answer that includes the word "may."

According to the Energy Star Web site:
"The majority of the geothermal heat pump property and its installation is covered by the 30% tax credit. All geothermal heat pump components certified by the manufacturer in the "Manufacturer Certification Statement" will be covered. There may be some add on components that will not be covered such as an emergency back up system and the ducts. These components are not directly related to the efficiency of the covered geothermal heat pump property.

"IRS Guidance: Notice 2009-41 Section 3. (1)(e) Qualified geothermal heat pump property expenditures are expenditures for equipment which uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is actually made (even if under § 25D(e)(8) the expenditure is deemed made at a later time for purposes of determining the taxable year for which a taxpayer may claim the credit), and is installed on or in connection with a qualifying dwelling unit."
http://energystar.custhelp.com/cgi-bin/energystar.cfg/php/enduser/std_ad...


7.
Mon, 03/01/2010 - 02:31

UPVC Windows and rebates
by Paddy

Helpful? 0

Martin. This is the first time I have read any of your posts. I am impressed. This is easy to read and process. I have been concerned that the detail was not clear in other publications that I have read. As you and other writers have stated' even the formal advice is vague. I am not sure how the average family can make sense of the rebates. I would be surprised if there were not many families who have opted not to claim. It has been my experience that wholesalers and retailers are struggling to understand who is eligible for what. I will be informing my colleagues and friends of your postings.

I do have one question! Are you able to tell me if there are rebates for specific window treatments, such as uPVC Windows, triple glazing, frameless windows. Can they be retrofitted or is it for new homes only.


8.
Mon, 03/01/2010 - 06:24

Windows
by Martin Holladay, GBA Advisor

Helpful? -1

Paddy,
The tax credit for widows is a homeowner tax credit for replacement windows. I'm not sure what you mean by "frameless windows"; if you mean windows without nailing fins, they can qualify. To be eligible for the tax credit, windows installed after June 1, 2009 must be NFRC-rated, and must have a maximum U-factor of 0.30 and a maximum solar heat gain coefficient (SHGC) of 0.30.


9.
Mon, 04/12/2010 - 18:20

Getting certified
by Michael Schwartz

Helpful? 0

For homeowners who want to know more about conserving energy, I would recommend getting their BPI Certification. It's pretty cool that anybody with a passion for conservation can become certified being that there are no prerequisites.


10.
Fri, 06/18/2010 - 14:38

If your taxes are too low or
by Anonymous

Helpful? 0

If your taxes are too low or you don't pay taxes, you are not eligible to the 30% back! So the people who really need the help don't get it! I saved all summer to get my 6 Marvin windows and nope, I won't get the 30% back!


11.
Sat, 11/27/2010 - 19:53

Windows
by Double Glazing

Helpful? 0

Being energy efficient is your best investment for your later life. Find solutions like the ones stated in here and put them into practice. Sooner or later you'll find your electric bills going down and your body being healthier, knowing that you can now invest more fore your self.


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