Would you like to save money every month on your energy bill? What if you could also put a significant dent in the amount of federal taxes you pay, while enjoying more comfort during the heat of summer or the cold of winter? How would you like to make a contribution to environmental quality, help reduce our dependence on foreign oil, and help stimulate the economy, while also increasing the value of your home? 

The good news is that with the right home improvements, all of these benefits can be yours. Thanks to the recent stimulus bill entitled American Recovery and Reinvestment Tax Act of 2009, certain types of energy-saving remodeling projects qualify for significant tax credits on your 2009 and 2010 federal returns. Other improvements even provide tax credits all the way through 2016 and are also available to new homebuyers. 

And there is more good news. If you have plans to put your home on the market in the next several years, you may be able to recoup a significant part of your investment in home energy savings through a bigger check at closing. For example, a recent study of cost versus value in home improvements showed that window replacements could return as much as 79.2% of their cost in the form of a higher sales price. 

Of course, as long as you live in your home the renovations will contribute to the quality of your life and allow you to live in greater comfort. Similarly, if you want to buy a home but are hesitating because of the expense of energy-saving updates, the tax credits can make your decision easier, since they effectively reduce the renovation cost. In either case, the benefits don’t end with a lower income tax bill. Substantial monthly energy savings can translate into more disposable income to spend on whatever you enjoy the most.

Investments That Qualify for the Tax Credits

The recent tax credit bill is designed to stimulate the economy while also helping to save energy. What renovations qualify for these special tax credits and how much is available in the way of savings? There are two types of projects. In the first group are those such as upgrades to windows and doors, insulation improvements, installing a metal or asphalt roof, and utilizing more fuel-efficient heating and air conditioning units. This first group also includes installation of more efficient non-solar water heaters as well as the purchase of certain types of biomass stoves for general heating or water heating. Biomass stoves are those that burn plant-based fuels that are available on a renewable or recurring basis. Examples are wood pellet or corn stoves. 

For these types of renovations, savings are available on 2009 and 2010 returns. Projects such as these must be placed in service (which means they are ready and available for use) between now and December 31, 2010. The tax credit amount is 30% of their cost, up to $1,500. This means a $4,000 improvement could yield a $1,200 credit against taxes owed. The maximum total credit allowed for all such projects cannot exceed $1,500. 

If you choose to undertake renovations that make use of alternative energy sources, you can receive a credit of 30% of the cost with no upper limit. Tax credits for these kinds of projects are available through 2016, if placed in service before December 31 of that year. Qualifying projects include installation of geothermal heat pumps, solar panels, solar water heaters, small wind energy systems, and fuel cells. 

While the tax credit program is very generous, there are some restrictions. A big variable is installation costs, which can be included in computing tax credits for some projects, but not others. For example, if you are replacing your air conditioner or water heater, or if you are installing a biomass stove or a geothermal heat pump, installation costs are included. On the other hand, only the cost of materials is included in tax credit computations for windows, doors, insulation, or roofing. 

To determine if you have a qualifying project, start with a visit to the Energy Star Web site at www.energystar.gov/taxcredits. Of course, you will also want to consult your tax advisor before starting your project. If you determine that your renovation is one that does not include installation costs, let your contractor know that you will require an itemized bill that separates out labor and materials. 

Qualifying for Tax Credits

There are no income limits for the tax credits, which means any homeowner can qualify. To receive the entire credit, the taxes you owe must exceed the credit amount. If you select renovations which are subject to the $1,500 maximum, excess amounts cannot be carried forward to future years. All projects do not have to be completed in the same year, however. You could do a $2,000 roofing project this year and take the $600 (30%) credit on your 2009 return. Then next year you could spend up to $3,000 on other renovations such as a biomass stove, insulation, or windows to receive another $900 in credits in 2010.

In most cases, to qualify, the improvements must be to your principal residence. This means if you are lucky enough to own a second home, there may be many reasons to make it more energy-efficient, but what you spend will not yield a tax credit. There are, however, a few exceptions to this rule as well. 

Certain renovations (primarily those which make use of alternative energy sources), do qualify for the tax credit, even if they are done on a second home. Some of these include installation of geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems.

Benefits to Buyers and Sellers 

From a seller’s perspective, making your home greener can help it sell more quickly and for a higher price. In a recent study by McGraw-Hill based on a survey of one million households, it was found that 70% of buyers are more inclined to purchase a home with green features, especially during a down market. Of course, these features also make for a home that is more comfortable and more economical to operate in the meantime. Even before the recent tax credit legislation, 42% of homeowners in this study gave going green as the most important reason for undertaking renovations. The available tax credits may increase this figure. As more homes go green, it will be increasingly important for others to upgrade in order to be competitive when their homes finally go on the market. Fortunately, the tax credits make it easier to do so. 

If you haven’t upgraded your heating and air system lately, that may be a good place to start. Bruce Locker of Robertson Electric in Charlottesville related that lots of people are doing just that, particularly since older systems can be very inefficient. He gave as an example old gas furnaces that allowed as much as 40% of their heat to be lost up the chimney. To qualify for the credits, your new gas furnace must be 95% efficient, which means only 5% heat loss. Another big benefit of a newer heating and air system is more even temperature throughout the house, which means greater comfort. According to Locker, in most cases a new heating and air system will not use up the maximum allowable $1,500 credit. 

If you install a new heating and air system and are thinking about selling, be sure to save your utility bills as proof of the effectiveness of your upgrades. In addressing this issue, Cynthia Hash, a REALTOR® with Keller Williams Real Estate who holds the new Green REALTOR® designation, suggests doing the repairs at least six to nine months ahead of going on the market. If you want to sell during next year’s spring market, the time to start repairs is now. This will allow you to benefit from this year’s tax credits and also give you several months of paid utility bills to prove to prospective buyers that your home is truly green. 

What if, on the other hand, you are a buyer? How do the tax credits help you? Suppose you are one of the 70% looking for a green home, but you fall in love with a house with a creaky old heat pump, insufficient attic insulation, or an ancient, rusty water heater? Since you know the tax credits are available, you can evaluate the repairs and figure the savings before making an offer on the house. Obviously, it is easier to make an offer knowing you have big savings coming your way at tax time. Just remember, there is a deadline on the completion of repairs in order to receive this generous benefit. 

If you are evaluating available energy savings, a good renovation to consider is the tankless water heater. According to Irene Patterson of Charlottesville Gas, this popular device heats water only as needed. She says the gas company receives lots of calls about this option, which offers substantial energy savings over a conventional heater. An additional benefit is that this is one of the upgrades for which installation costs are included when figuring tax credits. 

Whether you are a buyer or a seller, keep in mind that the biggest savings come from renovations which make use of alternative energy sources. These may cost more up front, but the tax credits and ongoing savings are much greater as well. For example, expect a 50% to 80% drop in the cost of heating your water when you go solar. Geothermal heat pumps, another popular upgrade, use 30% less energy than standard models and their operation is much quieter. 

While many of the credits are available to existing homeowners only, people building new homes receive credits for innovations that make use of alternative energy sources. While most of us are familiar with solar as a source of energy, we may be less knowledgeable about wind. Steve Crandall, builder and owner of Tectonics II, LTD, is working to get approval from Nelson County to utilize residential wind turbines in some of his new homes.

Unlike solar systems where energy is stored for later use, a wind system is wired into the home’s panel box. If it generates excess electricity, the meter turns backwards, sending power back to the grid and giving a credit to the homeowner. An average household will save approximately 25% on their energy bill with one of these systems. Crandall described the tax credits as incentives to capture the money blowing through the air. 

In the case of new construction, the cost of the upgrades is included in the home price and therefore in the buyer’s mortgage payment. This means not only are tax credits available through 2016, but the interest deduction will be greater, because of the added cost of the upgrades. Consult with your builder and your tax advisor about which options make the most sense for your new home.

Choosing the Best Renovations

How do you as a consumer decide which renovations or energy saving options are best for you? A good place to start is by consulting your REALTOR®. Laura Winn Smith of Pace Real Estate, who holds a Green REALTOR® designation, advises that while your agent can’t be an expert on all things green, he or she is prepared to help you find the resources you need in order to make the best decision.