The goal of the American Recovery and Reinvestment Act tax credits is to both stimulate the economy by encouraging homeowners to complete energy-efficient upgrades and to save energy by requiring high-efficiency equipment and products. Tax credits have been offered by the federal government in past years, but the new legislation provides for a higher credit amount and an expanded list of improvements.
“The value of tax credits really can’t be overstated,” says Don Klein, a CPA with Klein & Associates, in Grand Rapids, Mich. A tax credit is a reduction in the amount of tax owed, and Klein says that the advantage of a tax credit over a tax deduction is that the credit amount is subtracted from the tax liability rather than from taxable income. A tax credit results in a greater benefit than a tax deduction of the same dollar amount.
For expenditures on improvements such as insulation, windows, doors, water heaters, furnaces, and air conditioners that meet specific efficiency standards, the 30% tax credit is limited to a $1,500 maximum for all improvements combined for tax years 2009 and 2010.
However, the 30% tax credit is not limited to a specific dollar amount for renewable energy improvements such as solar power and water heating systems, small wind energy generators, and geothermal heat pumps. For fuel cells, the credit is 30%, up to $500 per 0.5 kW of power capacity. In addition, for these categories, taxpayers can carry forward the tax credit to future years through 2016.
If a taxpayer’s tax liability is zero — that is, he does not owe taxes — he can carry the credit amount forward to a year when he does owe taxes. The tax credits are nonrefundable. Energy Star’s website, www.energystar.gov, states that “at the end of the year, you can’t get back more in credits than you paid to the government in taxes throughout the year. So, if you don’t pay any taxes, you can’t get the credit.”
If a homeowner is owed a tax refund, according to the Energy Star site, she will still receive a refund, as long as the total amount of income tax she has paid during the year is more than the total amount of tax credits that she is claiming.
A taxpayer must file a 1040 form to claim the credit. You cannot claim the credit if you are filing a 1040EZ tax form.
Taxpayers paying the Alternative Minimum Tax (AMT) can apply the credit against the AMT, but only in 2009. The Internal Revenue Service may choose to extend this rule to the end of 2010, so check with the agency or a tax preparer. Michael A. Bohinc, CPA at Keeping Score, in Cleveland, says that the AMT is complicated and that the best way to explain the effect of the credit is to say “taking the tax credit will not hurt you for purposes of AMT.”
Applying the Credit
According to the IRS, the credit must be claimed in the year that the homeowner made the expenditure for the improvements. Generally these expenditures are treated as made when the item is installed.
However, certain expenditures made in connection with new construction or reconstruction of a structure will be treated as made when the taxpayer begins to use the structure. This applies to solar power and water heating systems, small wind energy generators, fuel cell generators, and geothermal heat pumps.
The payment schedule has no bearing on the tax credit. A homeowner can pay for the installation months or years after the renewable energy system is installed, but still claim the credit in the year that it was installed or put in use.
For qualifying home improvements, a taxpayer can take a maximum of $1,500 in tax credits. According to Mark Brenner, senior manager at accounting firm Aronson & Co., in Rockville, Md., if a homeowner makes multiple improvements over the two years, they claim the improvements completed in 2009 in that year and the same for 2010. But the credit may also be split between the two years. “If you can’t use all of the credit in 2009, it carries forward to 2010,” Brenner says.
The credit is applied to the taxpayer, not to the property. So the $1,500 credit applies to improvements on any residences owned by that taxpayer.
The credits also apply to multifamily housing units. The IRS says that a tenant stockholder in a cooperative or a member of a condominium management association is treated as having made his or her proportionate share of the corporation’s or association’s expenditures when calculating his or her amount of the credit. For any energy improvements to a condominium building, Brenner says, a condo owner will likely receive an invoice from the association for his or her share.
Check with your state to see if the federal tax credit affects any state or utility credits available for the same equipment. A previous ruling that required state or local subsidized energy financing to be subtracted from the credit has been deleted for 2009/2010.
Six-Week Gap: The stimulus package was signed into law Feb. 17, 2009, and specified that the tax credits were retroactively effective as of Jan. 1, 2009. This created a six-week gap regarding the requirements because many of the ARRA specifications are more stringent than those in previous legislation.
The IRS has decided, however, that for products placed in service between Jan. 1, 2009 and Feb. 16, 2009, a taxpayer is eligible for the tax credit amount if the products meet the criteria in effect at the time of installation.
Documenting the Credit
Bohinc says that the claims process for the ARRA tax credits is similar to the claims process used by homeowners in the past. However, the new tax code for 2009, which will offer guidance and clarifications on the credit, will not be available until early August. Here are the basic steps homeowners will need to follow to claim the credit:
Step 1: Fill out IRS form 5695. The IRS currently has the 2008 version of the form [PDF]on its website. The revised 2009 form won’t be available until the end of 2009.
Step 2: Enter the information from form 5695 in the Tax and Credits section of form 1040. For the 2008 form, the credit amount is entered on line 53.
Step 3: The taxpayer must keep the invoice for his or her files but does not need to submit it with the tax return. The amount for the qualifying improvement or equipment on this invoice would be used in form 5695. Klein says that remodelers should provide homeowners with a detailed invoice that includes serial and model numbers for the equipment or products.
If the work is part of a larger remodel, the remodeler will have to provide a separate section on the statement that covers the tax-qualified items, or can even create a separate invoice. According to the Energy Star website, the cost can include sales tax and, since the price of a credit is defined as what a homeowner pays for it, most tax preparers assume that a subcontractor’s markup can be included in the price. However, the IRS has not yet provided clarification on a remodeler’s markup of a subcontractor invoice.
Step 4: The taxpayer must keep the manufacturer’s certification for his or her files but does not need to submit it with the tax return. A manufacturer’s certification is a signed statement from the manufacturer stating that the product or component qualifies for the tax credit.
Though the IRS has not yet released guidelines on what information must be included in the certification, it recently announced that homeowners claiming the credit can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels in purchasing qualifying equipment before June 1, 2009, until updated certification guidelines are issued later this year.
Until then, most manufacturers are using previous tax credit guidelines to create certifications. Many manufacturers offer online downloads of the certification. Subcontractors may also provide certifications. —Nina Patel, senior editor, REMODELING.
Every taxpayer’s situation is different. To be safe, installers and remodelers should always tell clients — and include in writing — a disclaimer about the credits, and should never tell taxpayers that they will definitely be able to claim the credit. Homeowners may purchase and install many different energy-efficient improvements over the two-year span that covers the credit (for nonrenewable systems and equipment), making it easy to lose sight of the $1,500 maximum limit on credits. For example, they may claim $1,500 for windows in 2009, then install a furnace in 2010; but because they used the full $1,500 in 2009, they cannot file for a credit in 2010 for the furnace.
Mark Brenner, of accounting firm Aronson & Co., recommends that contractors provide the invoice and manufacturer’s certification, and say only that “this equipment qualifies for the credit.” They should tell homeowners to check with a tax preparer about claiming the credit. —Nina Patel