Check Out the New Tax Credits for Going Green

Physician's Money Digest, February 2007, Volume 14, Issue 2

Did you put in replacement windows last year?Perhaps you installed a new furnace? Or maybe you finallygot fed up with gas prices and decided to buy that hybrid?As you and your accountant settle in for another head-scratchingsession of tax preparation, be aware that this yearthe government is offering new incentives for qualified energy-conscious purchases made in 2006. It comes as a result ofnew rules initiated under the Energy Policy Act of 2005,which apply to tax year 2006.

The new law now provides tax credits for making a principalresidence more energy efficient as well as for buyingcertain energy-efficient items and alternative motor vehicles,such as hybrids. These items must be "placed in service" ineither 2006 or 2007. The tax credits are subtracted directlyfrom the total amount of federal tax owed. "The good thingabout tax credits is there is a real dollar-for-dollar reductionof your tax liability," comments Nicholas D'Apolito, a LittleSilver, NJ-based accountant.

Home Efficient Home

However, D'Apolito cautions that with a few exceptions,many of the credits are just a few hundred dollars and thatunderstanding the qualifications can be "very confusing." He adds, "This is a very complex issue... nothing is as simple as it seems... Consult somebody before you claim thecredit and make sure you get good advice."

Physicians who made energy-efficient improvements totheir home this past year will benefitfrom a 10% credit of the total cost—upto a maximum of $500 for all taxableyears. Additionally, no more than $200of the credit may be attributable to windowexpenses. Improvements must meetor exceed the criteria established by the2000 International Energy ConservationCode, so your best source of informationis the item manufacturer or installer.Eligible improvements include:

  • Insulation systems that reduceheat loss/gain.
  • Exterior windows and skylights.
  • Exterior doors, including insulatedgarage doors, and metal roofs thatmeet Energy Star requirements.

The law also provides credits forcosts relating to residential energy propertyexpenses. These include: $50 foreach advanced main air circulating fan;$150 for each qualified natural gas,propane, or oil furnace or hot waterboiler; and $300 for each item of qualifiedenergy-efficient property. D'Apolitosays this last part refers to electric heatpumps, electric heat pump waterheaters, geothermal heat pumps, centralair conditioners, and hot water heaters.

Alternative Energy

Of course, reducing energy usageisn't the only way to help the planetand your pocketbook. Some physiciansmay have gone one step further byimplementing systems that create theirown energy. Those who have harnessedthe power of the sun by adding qualifiedsolar panels will be pleased toknow they are allowed one credit equalto 30% of their expenses (any otherfinancial incentives garnered from theinstallation must be deducted from theamount), up to a maximum of $2000.Those who have also added a qualifiedsolar water heating system are eligiblefor another equivalent credit. Unfortunately,no part of either system can beused to heat a pool or hot tub.

A 30% tax credit is also available tothose who have added a fuel-cell powerplant to their home. In general, a qualifiedfuel-cell power plant converts afuel into electricity using electrochemicalmeans, has an electricity-only generationefficiency of more than 30%, andgenerates at least 0.5 kilowatts of electricity.The credit may not exceed $500for each 0.5 kilowatt of capacity.

Hurray for Hybrids

This isn't the first year the governmenthas offered tax incentives for thepurchase of hybrids. Previously, a $2000deduction, taken as an adjustment toincome, was available. The deductionwas taken for the year in which thevehicle was first used and applied to taxyears 2005 and earlier. Physicians didnot have to itemize deductions on theirtax return to claim it, but they did haveto use Form 1040. The deduction wastaken on the dotted line to the left ofline 36 of the 2005 Form 1040, andidentified as "Clean-Fuel."

As a result of the Energy Policy Actof 2005, starting in tax year 2006 theclean-fuel deduction is now replacedwith a tax credit, dubbed the AlternativeMotor Vehicle Credit. Thus,qualified hybrids purchased on or afterJanuary 1, 2006, are eligible—and asmuch as $3400 may be claimed for themost fuel-efficient models.

Keep in mind that determiningwhich models qualify—and for howmuch—can be a bit tricky. First, thecredit is only available to the originalcar buyer; lessees do not qualify, theleasing company claims the credit. But,here's the confusing part, full credit onany particular model is only availablefor a limited time—until the car manufacturersells 60,000 hybrids. Specifically,the full credit amount may onlybe claimed until the end of the first calendarquarter after the quarter in whichthe 60,000th hybrid is sold. For the secondand third quarters following the60,000 quarter mark, taxpayers mayclaim 50% of the credit. For the fourthand fifth calendar quarters, taxpayersmay claim 25% of the credit. No creditis allowed after the fifth quarter.

For example, Toyota Motor Sales,USA, Inc, reached the 60,000-vehiclemark during the quarter that endedJune 30, 2006. So hybrids purchasedbefore October 1, 2006, qualify for thefull credit, but those bought on or afterthat date through March 31, 2007, cannow only claim a 50% credit. Further,Toyota hybrids purchased on or afterApril 1, 2007, through September 30,2007, only qualify for 25% of thecredit. Starting October 1 of this year,Toyota hybrid purchases will no longerbe eligible for any tax credit.

Count on your accountant to knowthe credit amount for your model anddate of purchase. For numbers as ofOctober 20, 2006, see the chart. Ifyou're thinking of purchasing a hybrid,stay abreast of credits as they change atwww.irs.gov. Clearly, the earlier youbought or choose to buy a hybrid, themore tax credit you may be due.

Tax credits are also available forfuel-cell vehicles, other alternative fuelvehicles, and hybrid heavy trucks. Visitwww.irs.gov for more information.And always check with your accountantfor final clarification on any taxissue.