Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

The credit is claimed on Form 5695, Residential Energy Efficient Property Credit, Part II.

The credit applies to energy improvements for a personal use residence. That means the residence can be a principal residence or another residence, like a vacation home. The home must be located in the United States and used as a residence by the taxpayer.

Property that qualifies for the credit includes the following items that meet federal standards:

1. Solar electric generating property;
2. Solar water heating property;
3. Qualified geothermal heat pump property;
4. Qualified small wind property;
5. Qualified fuel cell property. (This item only applies for a principal residence occupied by the taxpayer.)

The credit applies for items 1 through 3 placed in service after December 31, 2005 and before January 1, 2017. The credit applies for items 4 and 5 placed in service after December 31, 2007 and before January 1, 2017.

For property installed after 2008, the tax benefits of the property have been greatly expanded because the maximum limits for the credits have been eliminated. Previously, the first three credits were limited to $2,000. The maximum for small wind property was limited to $4,000. These limits have been eliminated after 2009. The maximum credit for fuel cell property after 2009 is $500 per 0.5 kilowatt of capacity for a taxable year. If a residence is occupied by two or more taxpayers, any limitations are allocated among them.

Expenditures before 2009 with funds obtained with subsidized funding were ineligible for the credit. This requirement was repealed effective after 2008.

The credit is 30% of expenditures for qualifying property made during a taxable year. The cost of on-site preparation, assembly, original installation of the property and the cost of wiring or piping to connect the equipment to the taxpayer’s dwelling are qualifying expenditures.

Costs allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than energy storage isn’t eligible for the credit.

The manufacturer of the property may certify to a taxpayer that the property meets some of the requirements that must be satisfied to claim the credit by providing a certification statement. The statement may be provided with the equipment or in printable form on the manufacturer’s web site. The certification isn’t required to be included with the taxpayer’s income tax return. We recommend that you keep the certification with your tax records and that tax return preparers get a copy of the certification from their clients when claiming the credit. The certification doesn’t mean the taxpayer’s residence qualifies for the credit.

The tax basis of the home improvements are reduced by the amount of the credit.

If the residence is used for both business and nonbusiness purposes and less than 80% of the otherwise eligible property is for nonbusiness use, then only the percentage of costs allocated to nonbusiness use can be used to compute the credit.

The generous percentage credit and the elimination of the ceilings, plus the reduction and possible elimination of energy bills makes this a very attractive tax benefit.

The credit is not refundable, but unused credits can be carried forward. For 2009, the credit was allowed to reduce both the regular tax, after reduction for the foreign tax credit, and the alternative minimum tax. (Internal Revenue Code Sections 25D(c)(1), 25D(c)(2), and 26(a)(2).)

The limit has been redefined for 2010. The credit can reduce the total of regular tax and AMT liabilities over the sum of the credits for dependent care, the elderly and disabled, adoption, child tax, home mortgage interest, education expenses, saver’s, nonbusiness energy property and foreign tax. (Internal Revenue Code Section 25D(c)(1).) Effectively, the limitation for 2010 is similar to the limitation for 2009.

(This is a correction to an earlier blog post stating the AMT couldn’t be reduced for this credit for 2010, with my apologies and thanks to Isaac Alfandary. The change in definition was made because other nonbusiness energy credits claimed at Form 5695, Part I can’t reduce the alternative minimum tax after 2009 unless the tax law is changed in an AMT “patch”.)

It’s a good idea to have your tax advisor estimate the amount that will be allowed as a credit on your income tax returns in advance. This will be difficult for 2010 because AMT patch legislation will probably be passed later this year, so the exemption amounts for 2010 are unknown and will probably have to be estimated.

IRS Circular 230 Disclosure:
As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.

Remember you can find past episodes of Financial Insider Weekly at www.financialinsiderweekly.com.