Tax credits give homeowners incentive to remodel efficiently

Lew Sichelmanmailto:lsichelman@aol.com

WASHINGTON (MarketWatch) — Question: Is installation of a gas tankless water heater (to replace a storage-tank water heater) tax-credit approved under the economic stimulus package singed by President Obama in February?

Question: Is that $1,500 lifetime ceiling for each item under the tax credits for energy efficient home improvements? In other words, is it $1,500 each for the windows, solar panels and tankless water heaters, or is it $1,500 for all improvements combined.

Answer: Glad you asked. There seems to be little knowledge of the tax credit deals Uncle Sam is offering owners who want their homes to perform better.

For starters, gas-fired tankless water heaters do, indeed, qualify. And the maximum credit you can claim is, save for a few exceptions, $1,500 per improvement or 30% of the cost of each one, whichever is less.

But let’s back up a bit for the uninitiated, who may have missed the fact that expanded tax credits for energy-wise home improvements were part of the same legislation that expanded the better-known tax credit for home buyers. The good news for those of us who are already owners is that while lawmakers saw fit to boost the buyer tax credit by a mere $500, they tripled the benefit available for the remodeling tax credit.

Under the old remodeling credit for windows, doors, insulation, non-solar water heaters, and heating, ventilation and air conditioning systems, you could claim a credit equal to 10% of the cost of each product, up to a lifetime cap of $500. (Credits were available for the 2006 and 2007 tax years, but not for products installed in 2008. However, these products are once again eligible for credits if they are installed this year or next.)

But like builders, who argued that the original $7,500 credit for first-time buyers wasn’t enough to bring people back into the housing market, especially since it had to be paid back, remodelers maintained that the energy credit wasn’t sufficient to persuade owners to pull the trigger either.

So Congress upped the ante, raising the per item credit to 30% of the cost and boosting the lifetime ceiling per item to $1,500. It also extended the deadline for making the improvements through the end of 2010. What’s more, the act is retroactive to Jan. 1, so if a product that met the previous criteria — the rules in effect between Jan. 1 and Feb. 17 — was purchased and installed during that period, it still qualifies for the larger bonus.

(A tax credit differs from a tax deduction in that it reduces the amount of tax you have to pay. For example, if you owe $800 in taxes and earn a $300 credit, you will owe only $500. Or if you owe nothing, you will get a $300 refund. A deduction, on the other hand, reduces the amount of income subject to tax. So if your taxable income is $35,000 and you have a $500 deduction, your taxable income is reduced to $34,500.)

The stimulus package also expanded the list of permissible improvements by including solar energy panels and water heaters, geothermal heat pumps, small wind-energy systems and fuel cells. Moreover, while the 30% credit applies to the added products, there is no cap on their cost, and the credit is available through 2016.

According to the Congressional Budget Office, the new provisions should generate an estimated $6 billion in remodeling work by the end of next year. And remodelers are waiting for their phones to ring. “We are more than ready to help our clients make their homes more energy efficient,” says Greg Miedema, a Tucson contractor who chairs the NAHB’s Remodelers Council.

Better yet, industry research suggests that remodeling and retrofitting the nation’s older homes will have a more significant impact in reducing residential energy consumption than meeting even the most aggressive efficiency goals for new homes.

A study last year in California found homes built before 1983 were responsible for 70% of the greenhouse emissions related to single-family energy consumption. The same study also said that retrofitting existing homes with energy-efficient features is four to eight times more carbon- and cost-efficient than adding further energy-efficient requirements on new construction.

Here are some other things owners should know about the federal tax credit for energy-efficient home improvements:

Homeowners can claim the credits on IRS Form 5695. Contractors need not provide you with product sales receipts to verify your claim, but you should retain the following for your records as backup:

Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 35 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. Email

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