Established by the federal Energy Policy Act of 2005, the federal tax credit for residential energy property initially applied to solar-electric systems, solar water heating systems and fuel cells. The Energy Improvement and Extension Act of 2008 (H.R. 1424) extended the tax credit to small wind-energy systems and geothermal heat pumps, effective January 1, 2008. Other key revisions included an eight-year extension of the credit to December 31, 2016, the ability to take the credit against the alternative minimum tax, and the removal of the $2,000 credit limit for solar-electric systems beginning in 2009. The credit was further enhanced in February 2009 by The American Recovery and Reinvestment Act of 2009 (H.R. 1: Div. B, Sec. 1122, p. 46), which removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after 2008.

A taxpayer may claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the United States and used as a residence by the taxpayer. Expenditures with respect to the equipment are treated as made when the installation is completed. If the installation is on a new home, the “placed in service” date is the date of occupancy by the homeowner. Expenditures include labor costs for onsite preparation, assembly or original system installation, and for piping or wiring to interconnect a system to the home. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. The excess credit can be carried forward until 2016, but it is unclear whether the unused tax credit can be carried forward after then. The maximum allowable credit, equipment requirements and other details vary by technology, as outlined below.
 
 
Solar-electric property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service before January 1, 2009.  
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.  
• The home served by the system does not have to be the taxpayer’s principal residence.  
• Note that the Solar Energy Industries Association (SEIA) has published a three-page document that provides answers to frequently asked questions regarding the federal tax credits for solar energy.

 
Solar water-heating property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service before January 1, 2009.  
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.  
• Equipment must be certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.  
• At least half the energy used to heat the dwelling’s water must be from solar in order for the solar water-heating property expenditures to be eligible.  
• The tax credit does not apply to solar water-heating property for swimming pools or hot tubs.  
• The home served by the system does not have to be the taxpayer’s principal residence.  
• Note that the Solar Energy Industries Association (SEIA) has published a three-page document that provides answers to frequently asked questions regarding the federal tax credits for solar energy.

 
Fuel cell property

• The maximum credit is $500 per half kilowatt (kW).  
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.  
• The fuel cell must have a nameplate capacity of at least 0.5 kW of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%.  
• In case of joint occupancy, the maximum qualifying costs that can be taken into account by all occupants for figuring the credit is $1,667 per half kilowatt. This does not apply to married individuals filing a joint return. The credit that may be claimed by each individual is proportional to the costs he or she paid.  
• The home served by the system must be the taxpayer’s principal residence.

 
Small wind-energy property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $500 per half kilowatt, not to exceed $4,000, for systems placed in service in 2008.  
• Systems must be placed in service on or after January 1, 2008, and on or before December 31, 2016.  
• The home served by the system does not have to be the taxpayer’s principal residence.

 
Geothermal heat pumps

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service in 2008.  
• Systems must be placed in service on or after January 1, 2008, and on or before December 31, 2016.  
• The geothermal heat pump must meet federal Energy Star program requirements in effect at the time the installation is completed.  
• The home served by the system does not have to be the taxpayer’s principal residence.

 
 
Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by “subsidized energy financing.” For projects placed in service after December 31, 2008, this limitation no longer applies.  
 
 
History  
The federal Energy Policy Act of 2005 established a 30% tax credit (up to $2,000) for the purchase and installation of residential solar electric and solar water heating property and a 30% tax credit (up to $500 per 0.5 kilowatt) for fuel cells. Initially scheduled to expire at the end of 2007, the tax credits were extended through December 31, 2008, by the Tax Relief and Health Care Act of 2006.  
 
In October 2008, the Energy Improvement and Extension Act of 2008 extended the tax credits once again (until December 31, 2016), and a new tax credit for small wind-energy systems and geothermal heat pump systems was created. In February 2009, The American Recovery and Reinvestment Act of 2009 removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after 2008.

The federal tax credit for energy-efficient home improvements was established by the Energy Policy Act of 2005. After expiring December 31, 2007, the credit was extended and expanded by The Energy Improvement and Extension Act of 2008 (H.R. 1424: Div. B, Sec. 302) and The American Recovery and Reinvestment Act of 2009 (H.R. 1: Div. B, Sec. 1121). The credit now applies to eligible equipment purchased between January 1, 2009, and December 31, 2010. In addition to extending the credit, H.R. 1424 and H.R. 1 strengthened the efficiency requirements for most equipment, extended the credit to stoves that use biomass fuel and asphalt roofs with appropriate cooling granules; raised the cap for the credit; and redesigned the way the credit is calculated.  
 
The credit applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment. Efficiency improvements or equipment must serve a dwelling in the United States that is owned and used by the taxpayer as a primary residence. The maximum amount of homeowner credit for all improvements combined is $1,500 for equipment purchased during the two-year period of 2009 and 2010.  
 
Building Envelope Improvements
Owners of existing homes receive a tax credit worth 30% of the cost of upgrading the efficiency of the building’s envelope. Installation (labor) costs are not included. The following improvements are eligible for the tax credit:

• Insulation materials and systems designed to reduce a home’s heat loss or gain
• Exterior doors and windows (including skylights) and
• Pigmented metal roofs designed to reduce heat gain, and asphalt roofs with appropriate cooling granules.

Heating, Cooling and Water-Heating Equipment
Taxpayers who purchase qualified residential energy-efficient property are eligible for a tax credit worth 30% of the system cost, including labor costs. The credit may also be applied to labor costs for assembly and original installation of eligible property. The following types of equipment are eligible:

• Electric heat pump water heaters
• Electric heat pumps
• Central air conditioners
• Natural gas, propane or oil water heaters
• Natural gas, propane or oil furnace or hot water boilers
• Advanced main air circulating fans
• Biomass stoves that use “plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers”

Performance and quality standards for tax credit eligibility vary by technology. (See 26 USC § 25C, H.R. 1424 of 2008 and H.R. 1 of 2009) for details. Additionally, the Energy Star web site offers detailed information on qualifying products, and IRS Notice 2009-53 provides more details.  
 
Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by “subsidized energy financing.” For projects placed in service after December 31, 2008, this limitation no longer applies. Businesses that receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.  
 
Background

  
The Energy Policy Act of 2005 established the tax credit for energy improvements to existing homes. The credit was originally limited to purchases made in 2006 and 2007, with an aggregate cap of $500 for all qualifying purchases made in these two years combined. There were also separate individual caps for the different equipment types. H.R. 1424 of 2008 reinstated the credit for 2009 purchases and made other minor adjustments. H.R. 1 further extended the credit to include purchases made in 2010 and replaced the $500 aggregate cap with a $1,500 aggregate cap for installations made in 2009 and 2010. Tax credits for installations made in 2006 and 2007 are still limited to $500. Any purchase made in 2008 is not eligible for this tax credit.  
 
Geothermal heat pumps were originally eligible for this credit, with a $300 cap. However, geothermal heat pumps are now eligible for the residential renewable energy tax credit, with no cap.

Solar and wind power may get the headlines and attention, but green-tech experts say 2010 will be dominated by energy efficiency, the mundane but critical process of cutting the amount of gas and electricity that homes and offices use.

Energy Secretary Steven Chu regularly describes himself as an “energy-efficiency nut.” Sixteen states, including California and New York, have passed legislation enabling homeowners to finance energy-efficiency upgrades through their property taxes. President Obama even declared insulation “sexy” at a Home Depot last month.

Then there are the sheer numbers:

Venture-capital investment in energy efficiency hit a record in 2009: at least 115 deals worth nearly $1 billion, according to a preliminary tally by the Cleantech Group and Deloitte. That’s up 39 percent from 2008.

Meanwhile, solar, which had 84 deals worth about $1.2 billion, was down 64 percent from 2008, and there’s increasing talk about solar being “overfunded.

Energy efficiency generally refers to a wide range of technologies designed to cut energy use such as improved lighting, greener building materials and sophisticated software that monitors power consumption.

And it’s increasingly seen as an effective way to create desperately needed jobs, save struggling consumers money, wean America from its dependence on foreign oil and reduce carbon emissions, all at the same time.

Home energy use accounts for 21 percent of the nation’s carbon footprint, roughly twice the carbon emissions of passenger cars, according to the Pew Center on Global Climate Change. There are 100 million homes in America, and energy-saving measures like insulation, caulking, and heating and cooling system upgrades can reduce household energy consumption by 10 percent to 40 percent, according to a memo by the President’s Economic Recovery Advisory Board.

When you really break it down, every dollar spent on energy efficiency pays back the investment four or five times. It saves people money and creates jobs.