Home Improvement Tax Credit

Easy Ways to Claim Tax Credits on Home Improvement

The home improvement tax credits were first introduced by the American Recovery and Reinvestment Act of 2009 as part of the home energy tax credit scheme. It has so far been extended to 2013 and this article takes a look at the tax credits allowed by the IRS under this category.
The Internal Revenue Service (IRS) releases a large amount of tax deductions every fiscal year for the benefit of taxpayers. Such deduction lists are principally used to reduce the amount of taxable income. After calculation of the tax component on income, a good way to manage the burden is to avail of these tax deductions, provided the requirements have been complied with. Even the smallest deductions go a long way in reducing the overall taxable income of an individual.

Tax credit on the other hand is a way to reduce the exact tax that you will have to pay for a particular fiscal year. In the case of a valid home improvement made by the taxpayer, he/she can claim the credit for it and reduce the net tax payable by the dollar amount permissible under the Federal Tax Credits for Consumer Energy Efficiency. Suppose the total tax payable in a fiscal year comes down to $1000 and home improvements have been made to the tune of $300, the net tax payable by will be $700. For homeowners looking to gain some tax advantage while cutting their energy footprint and also costs, this is a good way to go about the yearly tax management.

Home Improvement Energy Tax Credits under the ARRA Act, 2009

Tax credits for home improvements was first enacted as part of the American Recovery and Reinvestment Act of 2009. This was part of the stimulus package released by the President to boost the flailing economy after the financial crises of 2008. Under the provisions of the Act, the IRS and the United States Treasury Department have granted several tax credit provisions to tax payers. Primarily, the tax credits are given to individuals who have made improvements in their home's energy consumption by installing appliances or making structural changes.

In their original form these provisions were of two categories, one that expired in 2010 and the other that will be active till 2016. Although one of the provisions was set to expire in 2010 it was further extended into 2011, 2012 and now to 2013. Let's take a look at the various categories under which the tax credits for home improvements are offered and the paperwork required to file the credit return to the IRS.

Federal Tax Credits for Consumer Energy Efficiency - 2013 Update

Tax Credit Allowed: 10% of the cost of the improvement, to a limit of $500. The amount can also be a specific one between $50-$300.
Qualification: The home must be an existing one and the principal residence of the credit claimant. A principal residence here means the home one owns and lives in for the greater part of the year.

The following is a list of inclusions in the tax credits for the year of 2012, extended into 2013. The type and class of energy products under which a credit can be claimed remain the same as in the original act of 2009, with changes only in the credit limits. The two categories of provisions also remain unchanged with one extending into the tax year of 2016. Here is a breakup of the product categories under which the federal tax credit can be claimed in 2013.

Biomass Stoves
Equipment that heats homes or water or generates energy, when installed as part of the changes made during home improvement. The stove must burn residue, agricultural crops, grasses and fibers.
  • Tax Credit Limit: $300
  • Requirement: Must have an energy efficiency rating of at least 75%.

Heating, Air conditioning, Ventilating
Products such as an advanced main air circulating fan or air source heat pumps can become valid grounds for tax exemption. Similar credits are available for central air conditioning, gas and propane, water boiler, natural gas and propane furnace and also an oil furnace.

Air Source Heat Pumps
Such pumps are energy efficient because unlike air conditioners they don't use CFCs to cool the air. The pumps pull in cool air from the outside to where it is need. They work in reverse when required to heat the room or living space.
Tax Credit limit: $300

Central Air Conditioning
Always ask your manufacturer for a Manufacturer Certification Statement while purchasing a central air conditioner. Also make sure you purchase one which is certified by Energy Star.
Tax Credit Limit: $300

Gas, Propane, or Oil Water Boilers
These are a range of heating units which heat water by circulating it throughout the house and via a system of heating units and radiators.
Tax Credit Limit: $150

Natural Gas Furnace or Oil Furnace
A system that uses air and fuel mixture to heat homes.
Tax Credit Limit: $150

Insulation
One can also claim tax credits under home improvement criteria by installing insulation in the house. This is also a very cost-effective method of saving tax as it is easily available and the costs of installation are also not very high.
  • Tax Credit Limit: 10% of the cost incurred in insulation up to a limit of $500.
  • Requirements: There are several types of products which can qualify for the tax credit such as batts, rolls, blow-in fibers, rigid boards and expanding spray. However, products that have air sealant properties have to come with a Manufacturers Certification Statement to be able to qualify.
  • Installation costs are not covered under the tax credits.

Roofs (Metal & Asphalt)
Such roofs are made with special materials or layered with coating of paint which reflects back much more of the sun's rays than conventional roofing.
  • Tax Credit Limit: 10% of the cost of the roofing is covered by the tax credits but only up to a limit of $500.
  • Requirements: Metal roofs require certified pigments and coatings as do the asphalt roofs which need to be embedded with cooling crystals. The roofs also need to be compliant with Energy Star guidelines on cooling and energy efficiency.

Gas, Oil, Propane, Electric Water Heater
The water heating costs can also be covered to some extent by the home tax credit advantage as both electric and non-electric water heaters get a tax credit limit of $300.

Federal Tax Credits for Consumer Energy Efficiency valid till 2016


Tax Credit Allowed: 30% of the cost with no upper limit.
Qualification: The credits are claimable for both homes in existence and also for newly constructed residences. They are for principle residences only and are not allowed for rental property.

Geothermal Home Systems
The tax credit is applicable for geothermal heating and cooling systems which can be installed in homes and use the heat of the earth for their functioning. They are considered to be one of the most efficient of modern sustainable energy platforms.
  • Requirement: The geothermal pump or system must be certified by Energy Star to be eligible for the tax credit.
  • The credit will also include any cost of installation incurred.

Residential Wind Turbines
A modern and clean way of generating some extra electricity is to install a wind turbine on your roof. These turbines can integrate with the homes electrical systems and are effective cost cutters. The credit will also include costs of installation.

Requirement: The wind turbine installed should not be of a greater capacity than 100 Kilowatts.


Solar Water Heater/Panel
Solar water heaters are also a popular mode of alternate energy. Tax credits can be availed on these systems too as they are a clean renewable source of energy.

Requirement: The solar heater or any such equipment for which the credit is being claimed must generate at least half the energy from the sun. Also it must be certified by local or government bodies such as the Solar Rating & Certification Corporation (SRCC). They must also comply with building codes and fire regulations. The cost of the installation is also included in the tax credits. This is the same set of requirements for solar panels.

Filing for Home Improvement Tax Credits

The IRS website is the place to visit if one needs forms for filing tax returns.
  • The requisite form for filing tax credits for home improvements is the Form 5695.
  • It can be found under the Resources section of the website. You can follow the instructions given on the form and list the details of the improvements you have made, resulting in energy efficiency for your home.
  • Make sure you include the costs of installation in the tax credits where applicable and mention the installation of appliances which use alternate sources of energy.
  • Obtain Manufactures Certificates where necessary and attach them to the form.
  • This form must then be attached to your tax statement and submitted to the IRS.

The IRS website is a repository of accurate information regarding the processing of tax credits. It will provide you with the necessary step-by-step instructions regarding various compliance procedures, and also the filing of your income tax return.
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