Energy tax credits available for some home improvements

Dear Jim: I heard about the new energy tax credits for improvements. How long are they effective and what home items are covered? Also, will these credits save enough to make it worthwhile to make improvements? – Paul N.

Dear Paul: You make a good point about the savings from the tax credits. In my opinion, the credits are not large enough to provide a real incentive for someone to make energy-saving improvements unless they were already planned. Several contractors and manufacturers told me they have not seen a significant increase in sales of efficiency items as a result of the credits.

One problem is people may not realize these are tax credits and not just tax deductions. A tax credit actually reduces your tax bill by the total amount of the credit. A tax deduction reduces just the taxable base, so the actual savings you realize depend upon your specific tax bracket. In the 25-percent bracket, a $500 tax credit is equivalent to $2,000 income.

The Energy Policy Act of 2005 covers most typical energy conservation improvements to your home. These include insulation, replacement windows and improvements, doors, metal roofing, heating and cooling systems, water heaters, and solar systems. In most cases, the improvements must meet the 2000 IECC (International Energy Conservation Code) specifications.

The energy act was enacted for only two years, so your energy-efficiency improvements must be installed by the end of 2007. With the recent changes in control of the Congress, there is a better chance the energy tax credits will be expanded and extended past 2007.

There are limits on the amount of the tax credit depending upon the specific efficiency improvement. Many of the credits are for about 10 percent of the installed cost up to a maximum of $500. The total tax credit allowed for the two-year period is $500.

Using alternative fuels and heating provides the largest tax credit of 30 percent up to a maximum of $2,000. These include solar water heating and photovoltaics (solar cells) and fuel cells for producing your own electricity at home.

Door improvements provide a higher maximum tax credit than replacement windows even though replacing windows will save more energy. Installing efficient exterior doors and/or storm doors gets a $500 maximum credit.

Installing efficient windows, skylights and storm windows gets only $200.

If you need a new roof, consider installing a metal one which blocks heat. Metal roofs last a lifetime and you will receive a $500 tax credit.