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Energy Credits

Homeowners who made energy-saving improvements may be able to lower their 2010 tax bill.
Form 5695, Residential Energy Credits, is used to calculate and report residential energy credits, which include 1) the non-business energy property credit, and 2) the residential energy efficient property credit.

Non-Business Energy Credit
The non-business energy property credit has a maximum of $1,500 for 2009 and 2010 combined.  Costs could include high-efficiency heating and air conditioning systems, water heaters and stoves burning biomass, along with the cost of labor for their installation.  Energy-efficient windows, skylights, and doors, qualifying insulation, and certain roofs also qualify for the credit, though the cost of their installation does not.
These expenses must be made on or in connection with a dwelling located in the United States, owned and used by the taxpayer as his/her principal residence.
To qualify for the credit, improvements must meet certain energy efficiency requirements.

Residential Energy-Efficient Credit
Under the residential energy-efficient property credit, going green can also include qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Labor costs to install this property are generally included in the calculation of the credit.
Qualifying property must be installed in a dwelling located in the United States and used as the taxpayer’s residence.  It cannot, for example, be used to heat a swimming pool or hot tub.  For fuel cell expenses, the dwelling must be the taxpayer’s principal residence; special dollar limits apply for joint occupancy.
Taxpayers will need to obtain certification for their records that a component meets energy requirements; many Energy Star products qualify, though not all do.  Taxpayers can check Energy Star products at their website http://www.energystar.gov.  At the bottom of the screen, click the “Tax Credits for Energy Efficiency” button.
If the taxpayer cannot use all of the credit because of the tax liability limit (line 26 is less than line 23), the unused portion may be carried over to 2011.

Taking the Credit on the 1040 Return
Because these energy credits report in the non-refundable credits section of the 1040, tax liability has an effect on how much credit may be taken.  Let’s say the taxpayers have a tax liability of $1,000.  They have a foreign tax credit of $200 and an expected energy credit of $1,500.  The foreign tax credit removes $200 from the tax liability, making it $800.  That means the taxpayers will only be allowed an $800 energy credit as they are limited to the amount of available tax liability. For more information about energy credits, please see

  • IR-2010-110,
  • IRS Summertime Tax Tip 2010-16, and
  • Form 5695 Instructions.

by Merry Broughton

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