Tax Deductible Energy Home Improvements

Many home improvements that improve the energy efficiency of a residential house qualify for tax deductions. Often, the improvements will be Energy Star-certified. Although a number of these residential improvement credits were originally set to expire in 2009, they were extended through at least 2010. However, because improvements qualifying for a tax credit are subject to change at any time, it is important to consult a tax specialist before making home improvements.

First established in 2005, the Energy Policy Act gives tax credits to individuals and businesses for a number of energy efficiency home improvements. The tax incentives offered are credits, not deductions. A deduction discounts the income of an individual, lowering the amount of income on which taxes must then be paid. A tax credit, on the other hand, directly reduces the amount of those taxes owed, but does not decrease income levels. Tax credits are generally more beneficial to individuals; so, though there are no tax deductions for home improvements that promote energy efficiency, there are more beneficial credits. These credits were initially set to expire in different years, beginning in 2009, but have been extended until at least 2010. Because tax laws are subject to change, it is important to consult a tax specialist before making home improvements if you desire the credit, especially as the credit for many home energy improvements that may be claimed have different requirements and are set to expire in different years. Many improvements that qualify an individual for the tax credit will be Energy Star-certified. Energy Star ratings were created by the Environmental Protection Agency to inform consumers of the most efficient products. An Energy Star rating means that the improvement meets specific levels for energy efficiency in categories relevant to that product.

Roofs, insulation, doors and windows that are Energy Star-rated may allow an individual to claim a tax credit for $1,500 or 30 percent of the cost, whichever is lower. Products that qualify an individual for the credit improve the energy efficiency of a house by lowering the amount of energy required to maintain a desired temperature. The tax credit for roofs, insulation, doors and windows was extended at the beginning of 2009 for the years 2009 to 2010. In addition, windows were previously subject to a $200 credit. The credit for windows has thus been raised significantly. At the same time, requirements for windows has been significantly increased so not all Energy Star-qualified windows will meet the requirements for the credit. The tax credit for roofs, insulation, doors and windows applies only to the cost of materials and not to installation costs.

HVAC stands for "heating, ventilating and air conditioning" and encompasses air-temperature control in a house. New systems are significantly more efficient than older heating and cooling systems. New heating systems with the Energy Star rating may qualify for this credit, as can air circulators. Individual room heaters or air conditioners will not qualify. Biomass stoves are those that use fuel made from recently dead plants, such as wood pellets or agricultural waste. They can be used for water or heating a home and need a thermal efficiency rating of 75 percent or higher qualify for the credit. Biomass stoves can qualify a taxpayer for a credit up to $1,500 of the cost or 30 percent, whichever is lower.

Solar panels and geothermal heat pumps qualify for the tax credit. All Energy Star-rated geothermal heat pumps, which use the earth's energy to reduce heating costs, qualify for the credit. Solar panels, or photovoltaic systems, must meet all electrical and fire standards to qualify for the tax credit. The tax credit for both solar panels and geothermal heat pump improvements is up to 30 percent of the cost, with no upper limit.

Fuel cells, or microturbines, are a means of providing energy to a residence through chemical reactions. The requirements for fuel cell improvements that enable a taxpayer to claim the credit are that the cells must have an energy efficiency of 30 percent or more with a capacity of half of a kilowatt or more.They get a tax credit of 30 percent, or $1,500, whichever is lower. Installation costs are included in the amount qualifying for a credit. Small Wind Energy Systems enable a taxpayer to claim a tax credit of 30 percent of the cost, with no upper limit.

Solar water heaters use solar energy to heat water, and are also called solar domestic hot water systems. There is a tax credit through 2016 for up to 30 percent of the solar system's cost. Unlike many energy efficiency improvements, there is no upper limit for this credit. For solar panels, the panels must be used for residential living only--not swimming pools. Additionally, the property must have at least half of the energy provided by the solar panels. Non-solar water heaters include oil, gas and propane. They allow an individual to claim $1,500 or 30 percent of the cost, whichever is lower, for the years 2009 and 2010. There is also a tax credit for electric heat pump water heaters that improve the energy efficiency of water heaters for $1,500 or 30 percent of the cost, whichever is lower.