Residential Energy Credits in Tax Year 2016

Most of us are in the process of preparing our state and Federal income taxes for 2016. As you gather your documents and search for those all-important deductions, don’t forget that there are certain energy-efficient improvements you may have made to your home in 2016 that may allow you to claim a credit for those expenses.

The Nonbusiness Energy Property Credit (consult IRS instructions for Form 5695 for further information) is aimed at homeowners installing energy efficient improvements such as insulation, new windows, furnaces and alternative energy systems. The credit is more limited than in the past years, but can still provide substantial tax savings. In general, these are the guidelines to follow:

What are the Rules Regarding Residential Energy Credits?

You can only claim residential energy credits for your main home in the United States (This is not true for solar installations as noted later in this article).
The cost of purchase and installation of these energy-saving improvements count toward the credits:
• Insulation
• Exterior windows or doors
• Qualified roofing
• Natural gas, propane, or oil furnace or hot water boiler
• Advanced main air circulating fan used in a natural gas, propane or oil
• Heat pump, central air conditioner, or water heater
• Fuel cell property

How Much Can I Save with An Energy Credit?

You may be able to take a credit equal to the sum of a) 10% of the amount paid or incurred for qualified energy efficiency improvements installed during the 2016 tax year, and b) any residential energy property costs paid or incurred in 2016. This credit is limited by:

* A total combined credit limit of $500 for all tax years after 2005.
* A combined credit limit of $200 for windows for all tax years after 2005.
* A credit limit of $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property.

Credits for Approved Solar Installations

The tax credits for installing alternative energy systems in your home are calculated differently (see IRS publication 5695). You can get credit for the costs associated with purchasing and installing

• Solar water heater or solar electric property
• Small wind-energy property
• Geothermal heat-pump property

Installing alternative energy equipment in your main home can qualify you for a credit equal to 26% of your total cost, a credit available through the end of 2019. After that, the percentage steps down each year and then stops at the end of 2021. Qualifying equipment includes solar-powered units that generate electricity or heat water.

You can’t claim a credit for installing solar power at rental properties you own, but the exception is if you also live in the house for part of the year, and use it as a rental when you’re away. You’ll have to reduce the credit for a vacation home, rental or otherwise, to reflect the time you’re not there. If you live there for three months a year, for instance, you can only claim 25 percent of the credit: If the system cost $10,000, the 30 percent credit would be $3,000, and you could claim a quarter of that, or $750.

These improvements never qualify for the energy credits:
• Subsidized energy financing- If you applied for and received subsidized energy financing through a federal, state, or local incentive program
• Costs of a swimming pool, hot tub, or any other energy-storage medium with a function other than storage

The Big Picture

It can be frustrating to spend money on fixing up your home and not be able to deduct those costs or to only be able to deduct a portion of what you spent. Some expenses like repairs on those associated with ongoing maintenance are never deductible, but if you make actual home improvements, including installing a solar energy system, they add to the value of your home. By adding the cost of those improvement to your basis, the amount of capital gains you will owe on the future sale of your property will decrease.

By installing a solar energy system in your home, you receive some tax breaks now but you will also benefit later. A study conducted by National Renewable Energy Laboratory (NREL) concluded that homes with solar panels sell 20% faster and for 17% more money. In addition, U.S. Department of Energy’s (DOE) Lawrence Berkeley National Laboratory found that the sales price of the average home increased $17,000 with solar panels.