Tax credits reward energy savers

updated 4:03 p.m. ET Feb. 16, 2007

WASHINGTON - Did you install an energy-efficient water heater or furnace in 2006? How about a solar panel, storm door or insulation? You may reap a reward at tax time.

With fuel and other energy costs skyrocketing last year, consumers who purchased energy-efficient home improvements or hybrid vehicles can take a tax credit — one of the tax code’s biggest prizes.

Credits amount to pure gold for the taxpayer because they are a dollar-for-dollar reduction in tax liability, whereas a tax deduction only reduces the income against which tax is assessed.

Many home improvements can qualify for the residential energy credit, including insulation, certain water heaters, air conditioners, fans, furnaces, skylights, exterior windows and doors, solar panels and metal roofs with pigmented coatings designed to reduce a home’s heat gain.

The credit is usually 10 percent of the cost, though there may be separate limits for specific devices. For example, up to $50 can be claimed for a main circulating air fan and up to $150 for a natural gas, propane or oil furnace, or hot water boiler. No more than $200 of the credit can be for windows.

The credit is limited to $500 for the 2006 and 2007 tax years combined. So if you claim the entire $500 credit for 2006, you won’t get the credit for 2007.

Separately, taxpayers can take a credit of 30 percent of the cost of a solar panel, solar water heater or fuel cell power plant to heat their homes, up to a maximum credit of $2,000. No part of such a system can be used to heat a pool or hot tub, however.

To be eligible for a residential energy credit, the device has to be “qualified energy property,” meaning it must meet criteria established by the 2000 International Energy Conservation Code and its supplements or, for windows and certain other items, bear the Energy Star label.

How do you know if your improvement meets the test? The Internal Revenue Service permits you to rely on the manufacturer’s claim.

“You really are going to have to rely on the promotional material you get from the manufacturer,” said Bob Scharin, senior tax analyst from Thomson Tax & Accounting, who edits a monthly journal for tax professionals. “The IRS guidance says you can rely on that. If the IRS later finds that there were inaccuracies, they can fine that manufacturer.”

“Save your documentation,” says Mark Steber, vice president of tax resources for Jackson Hewitt Tax Service, which has 6,000 tax preparation locations across the country. “Many companies who provide these types of property have placed certifications on their Web sites. Coupled with proof of purchase, you should be in good shape.”

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