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Green Energy Tax Credits for Home Improvement & Energy Efficiency

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For homeowners and bill-paying renters, the cheapest way to save money on utilities is to reduce consumption. In summer, raising the temperature setting on your air conditioner or using a high-speed floor fan on all but the hottest days can drastically cut air conditioning costs. In winter, you can really trim your gas or oil bill by wrapping your windows, lowering your thermostat a few degrees, and settling into your favorite sweater.

Such fixes are fast, easy, and effective. But they don’t permanently reduce your fossil fuel-burning appliances’ carbon footprints or improve your home’s ability to retain warm or cool air. To make a lasting, meaningful difference in your home’s energy profile, more involved – and often expensive – home improvements and upgrades are required.

The good news is that federal, state, and local governments want your home to be more efficient and Earth-friendly. Surprisingly, so do many utility companies which, after all, earn money whenever your furnace or air conditioner kicks in.

Federal, state, and local tax credits and other financial incentives partially offset the cost of a slew of green energy and home efficiency projects, helping more homeowners finance them out of their savings or afford the principal and interest payments on FHA 203k renovation loans. Here’s a look at the present lineup of federal tax credits and incentives, plus a representative slice of the hundreds of state and local credits and incentives available today.

Federal Green Energy & Home Efficiency Tax Credits/Incentives

Most of these green energy and home efficiency tax credits are valid through the end of 2016, with the exception of the solar energy generation credit (available through 2021) and the EEM program (available indefinitely). They are offered by the Federal Government and are available to any U.S. homeowner who files a federal tax return. Unless otherwise noted, you can apply for each credit by filing IRS Form 5695 with your federal tax return.

Solar Energy Generation

Solar water heaters and photovoltaic solar electricity generation systems (solar panels) use the carbon-free power of the sun to heat water or generate electricity. They both qualify for a tax credit equal to 30% of the equipment and installation costs through 2019, with no cap on credit size. In 2020, the credit decreases to 26% of the total equipment and installation costs. In 2021, the credit further decreases to 22%, and expires completely on December 31st of that year. The credit can be claimed on existing and new construction homes (including second homes), but not on rental properties.

  • Solar Water Heaters: To qualify for the credit, solar water heaters must generate at least half their energy from solar and must be certified by the Solar Rating and Certification Corporation (SRCC). However, all ENERGY STAR-rated solar water heaters qualify. Heated water must be used in the dwelling itself – swimming pool and hot tub heaters don’t count. According to HouseLogic, the typical solar water heater costs $8,000 to $10,000 with installation, though pricier models can cost more.
  • Solar Panel Systems: Qualifying solar panels must generate electricity for the residence itself. They must meet all applicable fire and electrical safety code requirements, which can vary from place to place. According to Solar Power Authority, equipment and installation costs add up to approximately $7 to $9 per watt, or $25,000 to $30,000 for a five-kilowatt system capable of powering the average American home. However, solar panel prices have fallen considerably in recent years, and many utilities offer incentives that reduce out-of-pocket costs.

Wind Energy Generation

Residential small wind turbines use the power of the wind to generate carbon-free electricity. Though they’re compact compared to utility-scale turbines, which soar hundreds of feet into the air and sweep an area of an acre or more, they do require ample space, so they’re not ideal in densely populated urban areas.

According to the American Wind Energy Association, equipment and installation costs for a turbine sufficient to power an average home (roughly five kilowatts of generating capacity) costs approximately $30,000 and pays for itself within 6 to 30 years. Many installers offer financing options that reduce upfront costs.

Small wind turbines qualify for a tax credit equal to 30% of equipment and installation costs, with no upper limit on credit size. Qualifying turbines’ “nameplate” generating capacity (maximum capacity under ideal wind conditions) must be no more than 100 kilowatts. The credit can be claimed on new and existing primary residences and second homes, but not on rentals.

Geothermal Heat Pumps

Geothermal heat pumps draw upon the planet’s vast reserves of internal heat to generate low-carbon heat and electricity. Depending on the system, they provide hot water, air conditioning, and home heating. According to the Department of Energy, geothermal heat pumps use 25% to 50% less electricity than traditional heating and cooling systems. However, they’re pricey: According to EnergyHomes.org, it can cost $20,000 to $25,000 to install a geothermal system in a 2,500-square-foot home, with a payback period of up to 10 years.

Geothermal heat pumps qualify for a tax credit equal to 30% of equipment and installation costs, with no upper limit. Systems must meet the minimum efficiency and performance benchmarks outlined by the Department of Energy. They can generate some or all of the water heat, house heat, and air conditioning for the property. The credit applies to systems installed in new and existing primary homes and second homes, but not rental properties.

Geothermal Heat Pumps

Fuel Cell Energy Generation

Residential fuel cell and microturbine systems are compact units that simultaneously generate home heat, water heat, and electricity from a single location within the home. They typically run on natural gas or biofuels (liquid fuel made from organic materials), and can operate independently of the local power grid (meaning they continue to function during blackouts). They’re quite costly – per HouseLogic, equipment costs alone can hit $50,000 for an average-sized home, and installation costs can tack on an additional $12,000 to $25,000 in existing homes (new construction installations are much cheaper).

Fortunately, these systems qualify for a federal tax credit that’s almost as good as the wind, solar, and geothermal credits. Homeowners can claim credits equal to 30% of equipment and installation costs, with a maximum of $500 per 0.5 kilowatt of generating capacity. Qualifying systems must have efficiency ratings of 30% or better and generating capacities of at least 0.5 kilowatt. The credit applies to systems installed in new and existing primary homes only. Second homes and rental properties are not eligible.

Air Source Heat Pumps

Air source heat pumps efficiently distribute heat throughout the home, providing warm and cool air (in a single system) at anywhere from one-and-a-half to three times the efficiency of conventional heating and cooling systems. In mild climates, heat pumps can entirely replace traditional furnaces and air conditioners. In cold climates, heat pumps are typically paired with oil or gas furnaces to provide adequate heat during the cold season, though newer models are capable of operating through extended sub-freezing periods. According to the Northeast Energy Efficiency Partnerships, heat pumps save an average of $459 per year when replacing electric resistance heaters and $948 per year when replacing oil-fired systems.

Ductless air source heat pumps capable of heating an entire average-sized home cost anywhere from $2,000 to $7,000 for equipment and installation. Whole-house heat pumps that use existing ducts cost $2,000 to $8,000 for equipment and installation, and heat pumps that require new ductwork can cost upwards of $20,000 with installation.

Homeowners who install air source heat pumps in existing, owner-occupied homes qualify for a $300 federal tax credit, regardless of the system’s total cost. New construction homes, second homes, and rentals do not qualify. Systems must meet the minimum efficiency requirements outlined by ENERGY STAR.

Biomass Stoves

Also known as wood stoves, biomass stoves provide home heat by burning wood pellets and other types of fuel derived from plant matter – including raw wood, in some cases. Though biomass fuels are by definition renewable, wood stoves must meet the Environmental Protection Agency’s 2020 clean air standards, and local authorities may restrict their operation temporarily on bad air quality days. Homeowners are also strongly advised to follow the EPA’s voluntary Burnwise guidelines for safe, efficient operation.

According to the Department of Energy, a pellet stove capable of heating an average-sized home costs $1,700 to $3,000. Systems that burn other types of biomass fuels tend to cost more.

Homeowners who install biomass stoves with efficiency ratings of 75% or better can qualify for a $300 federal tax credit. Qualifying systems must be installed in existing principal residences. New construction homes, second homes, and rental properties do not qualify.

Install Biomass Stoves

Central Air Conditioning Systems

Efficient central air conditioning systems use grid electricity to generate and spread cool air throughout dwellings. According to This Old House, it costs $3,500 to $4,800 to install central air conditioning in homes with existing forced-air heating ductwork, and $7,000 to $8,000 to install central air in homes without existing ductwork.

Homeowners who install qualifying central air conditioning systems in existing principal residences can take a $300 federal tax credit, regardless of the system’s cost. New construction homes, second homes, and rentals do not qualify. Also, not all ENERGY STAR-rated central air conditioners qualify, and there is no master list of qualifying systems for consumers. Therefore, it’s a good idea to check with the Department of Energy or a reputable HVAC authority before making a purchase.

Non-solar Water Heaters

Non-solar water heaters use natural gas or electricity to heat water used in the home. According to Keystone Energy Efficiency Alliance, non-solar water heaters range in price from $1,025 for high-efficiency gas storage devices to $1,660 for electric heat pump water heaters, including installation.

Qualifying non-solar water heaters include all ENERGY STAR-rated electric heat pump water heaters and natural gas water heaters with thermal efficiency ratings of at least 90%. Electric storage tank and electric tankless water heaters do not qualify.

Homeowners who install qualifying electric heat pump and natural gas water heaters in existing principal residences can claim a tax credit of $300, regardless of system cost. Second homes, new construction homes, and rental properties are not eligible.

Conventional Fuel Boilers and Furnaces

Efficient boilers and furnaces use fossil fuels, such as natural gas and oil, to provide hot water or air to home heating systems. According to HomeAdvisor, a new high-efficiency boiler installation costs approximately $7,500, while a new furnace costs approximately $4,000 (though actual expenses vary significantly).

Homeowners who install qualifying boilers and furnaces in existing principal residences can claim a $150 federal tax credit, regardless of the system’s total cost. New construction homes, rental properties, and second homes do not apply. Qualifying boilers and furnaces must have an annual fuel utilization efficiency rating of 95 or better. However, as with central air conditioning systems, there is no comprehensive list of qualifying systems for consumers. Before buying, ask a neutral authority whether your chosen system qualifies.

Building Envelope Improvements

The “building envelope” is defined as any part of the building that lies between conditioned indoor spaces and the outdoors. Depending on its location and construction, a building’s envelope can include its exterior walls, roof, windows, doors, skylights, and lower-level floors.

The Federal Government offers several tax credits for improvements to various parts of the building envelope. Unless otherwise noted, all apply to existing principal residences only. Second homes, new construction houses, and rental properties do not qualify.

  • Insulation: This credit applies to insulation in any part of the building envelope, including attics, crawlspaces, basements, and exterior walls. Qualifying insulation types include (but are not limited to) batt, blow-in, roll, expanding spray, rigid board, and pour-in-place. Some additional products that reduce heat loss also qualify, including weatherstripping, caulk, house wrap, and canned spray foam for small air leaks. According to Fixr, insulation costs between $1 and $3 per square foot, so, for example, it costs approximately $500 to $1,500 to insulate a 500-square-foot attic floor, depending on the type of material. The credit is equal to the lesser of $500 or 10% of the total cost of materials, not including installation.
  • Roofs: This credit covers ENERGY STAR-rated asphalt or metal roofing materials with cooling granules or pigmented coatings designed to reduce heat absorption. According to HomeAdvisor, it costs $1,700 to $8,400 to professionally install a new asphalt roof, and $5,100 to $24,200 to professionally install steel or aluminum roofs. The credit is equal to the lesser of $500 or 10% of the total cost of qualifying roofing materials, not including installation.
  • Windows and Skylights: This credit applies to ENERGY STAR-rated windows and skylights, a full list of which (along with efficient doors) can be found here. Efficient replacements for existing windows and skylights – as well as new efficient windows and skylights (for instance, in home additions) – qualify. HouseLogic pegs the cost of a new double-paned window at $270 to more than $800, including installation. High-efficiency windows generally come in at the higher end of that range. The credit is equal to the lesser of $200 or 10% of the total project cost, not including installation.
  • Doors: This credit covers ENERGY STAR-rated exterior doors, which typically cost (according to Angie’s List) between $1,500 and $2,500. It is equal to the lesser of $500 or 10% of the total project cost, excluding installation. However, the cumulative credit for all window, skylight, and door projects cannot exceed $500 in a given year.

Building Envelope Improvements

Energy Efficient Mortgage Program

The FHA’s long-running Energy Efficient Mortgage program (EEM) bundles the cost of energy-efficient home improvements into a new purchase, refinance, or 203k rehabilitation loan and insures the entire amount. The portion of the loan earmarked for the improvements does not factor into the lender’s underwriting calculations.

For example, a borrower who would normally qualify for a loan no larger than $150,000 could get a $155,000 EEM if $5,000 of the loan’s principal went to cover approved energy-efficient improvements. Under FHA guidelines, borrowers can put as little as 3.5% of the purchase price down, though they’re required to pay mortgage insurance premiums until they reach 80% loan-to-value.

Before applying for an EEM, homeowners and buyers must get a home energy assessment from a qualified professional certified by Building Performance Institute or Residential Energy Services Network. They must then use the results of the assessment to identify realistic opportunities for efficient upgrades and improvements.

The EEM program is designed to reward homeowners for “cost-effective” projects only. FHA defines cost-effective upgrades and improvements to existing homes as those projected to pay for themselves over the upgrades’ expected lifespans, relative to the homeowners’ expected status quo energy costs during that period. In new construction homes, FHA defines cost-effective upgrades as exceeding the most recent HUD-adopted standards set by the International Energy Conservation Code.

The EEM program’s financing capacity is not unlimited. No matter how many cost-effective projects their assessors identify, nor those projects’ cumulative dollar value, homeowners can use EEMs to finance only the lesser of:

  • The total value of the cost-effective improvements identified by the home energy assessment
  • The lesser of 5% of the home’s adjusted value, 115% of the median local price of a single-family dwelling, or 150% of the national conforming mortgage limit

EEMs have been available to borrowers across the United States since 1995 and are expected to remain available indefinitely.

Selected State, Local, and Utility Credits/Incentives

Every state government has its own unique lineup of green energy and home efficiency tax credits and incentives. Many smaller jurisdictions, such as city and county governments, offer green breaks. And some of the country’s largest utilities cut their customers financial slack too.

DSIRE, a Department of Energy-funded initiative housed at North Carolina State University’s NC Clean Energy Technology Center, has a comprehensive, up-to-date list of state, local, and utility-run green policies and incentives. Here’s a geographically diverse sampling, courtesy of DSIRE.

  • Non-solar Water Heaters, Pennsylvania: Homeowners qualify for state income tax rebates equal to 10% of the systems’ installed costs, up to $250 per system. Qualifying appliances include electric heat pump water heaters, high-efficiency natural gas storage heaters, and high-efficiency natural gas tankless heaters.
  • Renewable Energy Products, Rhode Island: The state of Rhode Island waives its 7% sales tax on items refined by state statute as “renewable energy products.” These include solar photovoltaic panels, solar thermal collectors, geothermal heat pumps, wind turbine towers, and DC-to-AC inverters that allow homeowners to pump energy back into the electric grid. There is no cap to this exemption.
  • Solar Market Development Tax Credit (Residential Solar Installations), New Mexico: New Mexico’s Solar Market Development Tax Credit allocates $5 million annually to offset equipment and installation costs for residential solar photovoltaic (panel) or solar thermal systems. Homeowners can claim the lesser of $9,000 or 10% of the total system cost.
  • Pacific Gas & Electric Residential Rebates, California: Pacific Gas & Electric, a major California utility, offers utility bill rebates to customers who purchase efficient appliances and equipment. Rebates are subject to change by year, but 2016 rebates include $500 back on electric heat pump water heaters and $50 back on high-efficiency clothes washers.
  • Residential Energy Efficiency Loans and Rebates, Tallahassee, Florida: The City of Tallahassee offers a slew of residential energy efficiency loans and rebates (covering about 25 appliances and improvements in all). Loan terms typically range from 5 to 10 years and have 5% fixed interest rates. To qualify, borrowers must be residential electric or natural gas utility customers. Eligible appliances and improvements include efficient natural gas dryers, natural gas ranges, refrigerators, windows, doors, pool pumps, and roofing, as well as solar photovoltaic panels and water heating systems. On solar systems, loans can be as large as $20,000.

Residential Energy Efficiency Loans Rebates

Final Word

Green energy and energy efficiency technology have improved drastically – and have become significantly more affordable – since the late 20th century. Thanks in part to these tax credits and incentives, the pace of these improvements has accelerated during this decade.

Most new construction homes contain state-of-the-art appliances, building envelope improvements, and mechanical systems. They offer a degree of efficiency and comfort that simply didn’t exist a generation ago. Most importantly for cost-conscious home buyers and homeowners, these systems are less expensive to install, meaning they pay for themselves faster than ever before.

There’s no guarantee that current and future politicians will step up to renew expiring green energy and energy efficiency tax credits, nor pass new ones into law. However, with all the strides we’ve made in recent years, it’s possible that we’ve reached a tipping point at which wind, solar, and efficiency technologies no longer need substantial government support to entice buyers. Whatever your political inclinations, that’s a collective achievement to take pride in.

Have you taken advantage of any green tax credits or incentives recently?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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