Energy Efficiency Home and Vehicle Tax Credits

Many tax credits for homeowners and commuters that expired at the end of 2011 have been reinstated until the end of this year. If you made energy efficiency improvements to your home or purchased an eligible efficient vehicle in 2012, you may claim those credits on your 2012 tax return, using the criteria below.

Please note: We at the Alliance to Save Energy are experts on energy efficiency, not taxes, and we do not provide tax advice; you may want to consult a tax professional.

1. Introduction to Tax Credits
2. Home Energy Efficiency Tax Credits (2012-2013)
3. Electric Vehicle Tax Credits (2010 onwards)
4. Geothermal Heat Pumps, Renewable Energy, and Fuel Cells (through 2016)

Different tax incentives apply for businesses (although the electric vehicle credit may be claimed by either individuals or businesses).

1. Introduction to Tax Credits

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This page provides details on valuable federal income tax credits for consumers who purchase fuel-efficient hybrid, electric or diesel vehicles and who make certain specified energy efficiency upgrades to their homes. The recently enacted American Tax Payer Relief Act (H.R. 8) extends home, vehicle, and appliance efficiency tax credits, which expired in 2011, until the end of 2013.

Consumers who employ energy-efficient products in their homes or drive fuel-efficient vehicles enjoy multiple benefits. At home, these benefits include lower home energy bills, increased indoor comfort, and reduced air pollution. On the road, consumers will increase their gas mileage so they lower their gasoline costs, and they will dramatically reduce the amount of air pollution from their vehicles.

In addition to helping savvy consumers lower their energy bills at home and on the road, the energy-efficient products eligible for the new federal tax credits actually lower the amount of federal income taxes that these taxpayers must pay Uncle Sam.

• What is a tax credit? You don’t receive an income tax credit when you buy the product, like an instant rebate. You claim the credit on your federal income tax form at the end of the year. The credit then increases the tax refund you receive or decreases the amount you have to pay.
• Tax credits vs. tax deductions: In general, a tax credit is more valuable than a tax deduction of the same amount. A tax credit generally reduces the tax you pay, dollar-for-dollar. Tax deductions – such as those for home mortgages and charitable giving – lower your taxable income by a percentage of the amount deducted. If you are in the 39.6 percent tax bracket, the income tax you pay is reduced by 39.6 percent of the value of a tax deduction. But a tax credit reduces your federal income tax by 100 percent of the amount of the credit.
• What about other incentives? In addition to the federal tax credits, consumers in some areas of the country also will be eligible for utility, state or local rebates and tax incentives for homes, vehicles and equipment. For information on these incentives, see the DSIRE database of incentives, or contact your state energy office or local utility.
• Which year's credits do I claim? The credit value and technical criteria for the home improvement credits depend on when that improvement was installed. If you purchased a product in 2010, but didn't install it until 2011, the 2011 criteria apply.

A tax extenders bill passed by Congress in December 2010 – most widely known for its extension of the "Bush-era tax cuts," unemployment insurance, and estate tax provisions – also included a number of provisions that extended and altered tax credits for energy efficiency, including the popular "Non-Business Energy Property" credit for home energy efficiency retrofits. This extension returned the credits to a form similar to that which existed in 2006 and 2007 - with lower values than was the case for 2009 and 2010 when the credits were renewed and altered by the American Recovery and Reinvestment Act (ARRA) of 2009 and Emergency Economic Stabilization Act (EESA) of 2008. On January 2, 2013 the American Tax Payer Relief Act of 2012 was enacted reinstating key energy efficiency tax incentives for homeowners, commuters, builders, and appliance manufacturers. The tax credit, which originally expired in 2011, has been retroactively restored for 2012 and extended until December 31, 2013.

A brief history of the home improvement, 'non-business energy property,' tax credit:

• The tax credits were first enacted in the Energy Policy Act of 2005 (P.L. 109-58), signed on Aug. 8, 2005
• The home improvements credit was available for 2006 and 2007, but expired for 2008.
• It was renewed for 2009, and other credits were added, in the Energy Improvement and Extension Act of 2008, part of the Emergency Economic Stabilization Act of 2008 (P.L. 110-343), signed on Oct. 3, 2008.
• Many further modifications and extensions were included in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), signed on Feb. 17, 2009; these changes applied for the remainder of 2009 and for 2010.
• The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312) extended the credits through 2011, but largely returned them to the structure as it existed in 2006 and 2007.
• Several key tax incentives for energy efficiency improvements that expired at the end of 2011 were extended through December 31, 2013 through the reinstatement of the American Tax Payer Relief Act of 2012.

Tax credits for hybrid, "lean-burn" diesel, and alternative fuel vehicles also expired at the end of 2010, but credits for plug-in electric vehicles are still available. Credits for geothermal heatpumps, residential renewable energy projects, and fuel cells also remain available for 2011 and beyond.

Tax Code Sections

• The home improvements credit (formally called the “nonbusiness energy property” credit) is in section 25C of the tax code.
• The hybrid, 'lean-burn' diesel, and alternative fuel vehicle credits are part of the “alternative motor vehicle” credit in section 30B of the tax code.
• Electric vehicles are in 30D, the "new qualified plug-in electric drive motor vehicles" credit.
• The new geothermal heat pump credit, along with the credits for solar equipment and fuel cells, are called the “residential energy efficient property” credit and are in section 25D of the tax code.

Tax Credits Available to Businesses

A commercial building retrofit deduction is available, though unlike the residential credits, it is based on whole-building performance levels and is a deduction rather than a credit.

Businesses can claim the vehicle tax credits.

Businesses that build or manufacture certain other energy-efficient consumer products (see below) also are eligible for federal income tax credits. While these credits do not go directly to consumers, they could reduce the cost to consumers of:

• New energy-efficient homes through 2011;
• Energy-efficient refrigerators, clothes washers and dishwashers through 2011.

2. Home Energy Efficiency Tax Credits for 2012

The reinstatement of the American Tax Payer Relief Act of 2012 amends section 25C of the tax code, which details nonbusiness energy property tax credits, and extends these credits until December 31, 2013. Changes made to this section apply to property placed in service after 2011.  Previously, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended section 25C by one year through 2011. It also largely returned the structure of the provision as it existed prior to the 2009 American Recovery and Reinvestment Act (ARRA), with some tighter requirements for improvements to qualify.

Between 2011 and 2013, there are differing credit values for different types of energy efficiency improvements. Some of the technical criteria for eligibility are also changed.

Who gets it? Individuals who install specific energy-efficient home improvements in their primary residences, which they own.

What energy-efficient home improvements are eligible? The overall $500 cap can be reached in several ways with the purchase and installation of energy-efficient products that meet certain efficiency criteria:

• Exterior windows: Includes skylights and storm windows.
• Insulation, exterior doors or roofs: Includes seals to limit air infiltration, such as caulk, weather stripping and foam sealants, as well as storm doors.
• Central air conditioner, heat pump, furnace, boiler, water heater or biomass (e.g. corn) stove. A separate credit applies for geothermal heatpump systems.

In addition, to be eligible for the federal tax credits:

• Windows, doors, insulation and roofs must be expected to last at least five years (a two-year warranty is sufficient to demonstrate this).
• Manufacturers can certify (in packaging or on the company’s website) which of their products qualify for the tax credit. Retailers, contractors and manufacturers should be able to help you determine what levels of insulation and what other products qualify.
• All the improvements must be installed in or on the taxpayer’s principal residence in the United States. Condo and co-op improvements are apportioned to the owners proportionally.

How much is the credit? The tax credit amount is now 10 percent of the cost of building envelope improvements, excluding labor costs and limited to $200 for windows, and specific dollar limits for heating and cooling equipment. There is a cap on the credit amount of $500 for fiscal years 2006 through 2013 combined; if you have ever claimed this credit in the past, it counts against the $500 limit (but does not affect the $1500 limit available for 2009 and 2010). So, for example, if you claimed $300 in 2007, you can only claim $200 in 2011; if you claimed $800 in 2009, you cannot claim any more credit.

When is it available? The home improvements tax credit applies for improvements "placed in service" from Jan. 1, 2011, through Dec. 31, 2013. The IRS defines "placed in service" as when the products or materials are ready and available for use – this would essentially always refer to the installation, not the purchase.

What do I need to do to get the tax credit? You will need to file IRS Form 5695 with your taxes. However, tax forms reflecting the tax credit extensions under the American Tax Payer Relief Act of 2012 are yet to be released. In addition, you will need to keep at least receipts proving that you purchased the improvements and a copy of the manufacturer’s certification. Accountants and tax advisors should also be able to provide more guidance.

IRS guidance on the credits for 2012 should be forthcoming. It will presumably substantially mirror guidance provided for the 2006 and 2007 credit, although some of the eligibility criteria have changed:

• Notice 2006-26, Credit for Nonbusiness Energy Property
• Notice 2006-53, Clarification of Notice 2006-26
• Notice 2009-53, Credit for Nonbusiness Energy Property

Credit values and requirements for property placed in service between 2011 and 2013:

• The total credit cannot exceed $500, must be installed on a taxpayer’s principal residence in the United States, and be reasonably expected to last at least five years. The $500 limit applies to cumulative claims for this credit dating back to 2006.
• For advanced air circulating fans, boilers, water heaters, heat pumps, air conditioners, and biomass stoves, the credit values listed are technically 100 percent of costs, including labor, up to that value, but in practice any of these improvements can be expected to earn this maximum value.

3. Electric Vehicle Tax Credits

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Highway-capable battery-powered plug-in vehicles purchased or leased new may be available for a credit of up to $7,500, based on their battery capacity, under section 30D of the tax code. Use IRS form 8936 (not always necessary for business use); businesses will also note the credit on form 3800. This credit begins to phase out for a given manufacturer once that manufacturer has sold 200,000 qualifying vehicles in the United States. A similar credit was available for EVs purchased in 2009.

Further information about tax credits for electric vehicles is available at FuelEconomy.gov and from the IRS.

Source: IRS, updated  September 25, 2012.

A smaller credit of up to $2,500 for certain "low-speed" neighborhood electric vehicles (including two- and three-wheeled vehicles) was available through 2011 and has been extended to December 31, 2013. A credit under tax code section 30B also existed for conversion of vehicles to plug-in hybrid vehicles; it was worth 10 percent of costs up to $40,000 and was available through 2011. Use form 8834.

4. Geothermal Heat Pumps, Renewable Energy and Fuel Cells

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Tax credits are available for geothermal heat pumps solar photovoltaic cells, solar water heaters, and fuel cells, also modified starting in 2009. These credits are available through the end of 2016.

Geothermal (or ground-source) heat pumps placed in service starting in 2009 are now eligible for a tax credit for 30 percent of the cost, with no maximum. These credits are effective through December 31, 2016. In order to be eligible for the tax credit, geothermal heat pumps must meet ENERGY STAR criteria. Currently, the criteria for ENERGY STAR geothermal heat pumps are:

• For a closed-loop system, 14.1 EER and a coefficient of performance (COP) of at least 3.3.
• For an open-loop system, 16.2 EER and 3.6 COP.
• For a direct expansion system, 15 EER and 3.5 COP.

In addition, the geothermal heat pumps must include a desuperheater, which helps heat water, or an integrated water heating system. In 2006 and 2007 geothermal heat pumps were eligible for a smaller credit as part of an earlier version of the home improvements credit described above.

Solar hot water heating and photovoltaic power systems placed in service by Dec. 31, 2016 are also eligible for the 30 percent credit, as are small wind systems. More information on renewable tax credits is available from the ENERGY STAR website.

Though available, residential fuel cell systems are rare in application. Some systems may be eligible for credits, subject to certain criteria.

Many of necessary tax forms for the above energy efficiency tax credits have not yet been updated to reflect the recent changes in the tax code. The International Revenue Service has noted that these forms will be available early in 2013.