The new law allows homeowners to claim 30% of the costs (up to a $1,500 limit) for the installation of higher efficiency furnaces, boilers, heat pumps, central air conditioning systems, and water heaters in tax years 2009 and 2010. Previous tax credits were limited to $300 for air conditioning systems and heat pumps and $150 for furnaces and boilers. This is a tax credit, not a deduction which is even better for the tax payer.

In the past, the largest barrier in upgrading to high efficiency systems has been the elevated cost. These tax credits will help shorten the payback period and allow you to immediately benefit from lower utility costs, help conserve fuel and electricity, lower your carbon footprint, and give you enhanced comfort in your home.

FAQ About the new tax credits:

Can the homeowner claim $1500 in tax credits for improvements made in 2009 and again for improvements made in 2010?
No. Taxpayers may only be eligible for a total of $1500 in tax credits for improvements made in the combined two year period of 2009 and 2010.

Can a homeowner use the entire $1500 limit as a credit toward the installation of one appliance?
Yes. A homeowner may use the entire $1500 in tax credits for installing a single appliance, such as a qualified furnace, air conditioner, heat pump, or hot water heater. 

What happens if the 30% of the installed costs is less than $1500?
The homeowner can “bank” the remaining available tax credit for other qualified improvements. Any single installation that costs more than $5000 will instantly reach the $1500 limit.

Does the tax credit apply to the cost of the equipment or equipment plus labor?
The tax credit applies to the installed costs of the qualified equipment, which includes labor.

How will a taxpayer claim the credit and receive their money?
In the past, the IRS has directed taxpayers to use Form 5695, Residential Energy Efficient Property Credit. Taxpayers are not required to file anything more than the form, but are instructed to keep records of their installation. It may be necessary for contractors to itemize information on a final bill so that taxpayers can properly claim the deduction.

How does the tax credit work for the installation of an advanced main air circulating fan? Does any furnace with an advanced main air circulating fan qualify?
No. The tax credit for the installation of an advanced main air circulating fan only applies in retrofit situations. The taxpayer claims 30% of the installed costs of the fan.

What’s the difference between a tax credit and a tax deduction?
As a tax credit applies against the taxpayers’ liability. A tax deduction applies against a taxpayer’s income, lowering the adjusted gross income and possibly moving the taxpayer to a lower tax bracket. Tax credits have a greater benefit to a taxpayer.

With a tax credit, if the taxpayer owes $2000, in taxes, their liability is reduced to $500. If they owe nothing, they can expect a $1500 refund.

What if the homeowners already claimed $500 in tax credits in 2006 or 2007?
The “lifetime caps” that used to be in place have been removed. Any previous claims do not count against the current $1500 tax credit limit.

Can a homeowner claim the credit for improvements to a second home?
No. The tax credit is only available for improvement to the taxpayer’s primary residence.

What about the $2,000 tax credit for homebuilders?
The Emergency Economic Stabilization Act of 2008 extended the Section 45L New Homes Tax Credit until December 31, 2009. This is a different tax credit available to homebuilders that install qualified higher efficiency appliances in new homes..

Can a small business that operates out of a townhouse and installs residential equipment in a commercial setting claim the credit?
No. The tax credit may only be claimed by taxpayers on their personal income taxes for improvements to their primary residence.

What other types of energy efficiency improvements qualify for the tax credits?
Homeowners may be able to qualify for the tax credits if they make qualified improvements to: windows and doors including skylights, storm windows and storm doors; roofing including metal and asphalt roofs; and insulation. All of these improvements qualify if they meet certain minimum standard, but homeowner may only claim $1500 in total for any improvements.

Am I guaranteed to qualify for the tax credit?
No. Each taxpayer’s situation is different. If you plan on making any other improvements to your home, you are only entitled up to $1,500 of home improvement credits. By installing qualified equipment, you may be qualified to claim 30% of the installed costs (up to a $1,500 limit) in tax credits.

Does a heat pump need to meet each of the minimums to qualify or just one?
Heat pumps must meet each of the minimum standards to qualify for the tax credits.

Does this apply to equipment installed in new homes?
No. The tax credit can only be claimed by taxpayers for improvements to existing homes.

Does this replace the Department of Energy or Energy Star program?
These tax credits are from the same program, but it has been modified and expanded. It is the same program that allowed taxpayers to claim up to $500 in tax credit in 2006 and 2007, and part of 2009. The differences are the tax credit limit is higher and the per-appliance caps have been removed.

Do ductless mini-splits meeting the HSPF criteria qualify for the tax credit?
Yes, as long as they meet or exceed the minimum qualifications for split air-conditioners (16 SEER and 13 EER) or split heat pumps (8.5 HSPF, 15 SEER, 12.5 EER).

What if the homeowner installs a furnace that meets the 95% AFUE standard but an central air conditioner below the standard? Can they still claim the full $1500?
The homeowners can claim 30% of the final installation costs (up to $1,500) associated specifically with the 95% AFUE furnacet. Should the installation costs associated with the furnace not reach $5,000, 30% of the installation cost can still be claimed and the difference between that amount and the $1,500 cap can be applied to any other qualifying improvements.