Energy-Efficient Appliances and Tax Deduction
The American Recovery and Reinvestment Act of 2009 extended many consumer tax incentives introduced in the 2005 Energy Policy Act. These acts bring good news to consumers, who can get tax credits in exchange for buying specific energy-efficient appliances for their homes. Manufacturers who produce these appliances stamp them with an "Energy Star" logo to make them easier to identify. In addition to federal tax incentives, some consumers will also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient homes, vehicles and equipment. Each state's energy office website may have more information on specific state tax information.
Central air conditioners or HVACs that meet specific requirements qualify for a tax credit of 30 percent of the cost, including installation. The tax credit may not exceed $1,500. You do not have to be replacing an older unit to qualify, but you might have to also replace your furnace to qualify. Check with your HVAC contractor to identify eligible air conditioners or heat pumps.
While the law does not require you replace both heating and cooling mechanisms in order to qualify for the credit, the reality is that most air conditioners on the market today are only eligible for the tax credit when the "indoor air handler" is also replaced, which is usually part of the furnace.
The IRS offers tax credits on three different types of water heaters. Tankless gas, oil or propane water heaters with a thermal efficiency of at least 90 percent, electric heat pump water heaters with an energy factor of at least 2.0 and SRCC-certified (Solar Rating and Certification Corp) solar water heaters where at least half of the energy generated comes from the sun.
These water heaters qualify for a tax credit that is up to $1,500, or 30 percent of the cost to purchase and install it.
Applying for the Energy-Efficiency Tax Credits
To claim the tax credit for energy-efficient products, you must have the installing contractor complete a Manufacturer's Certification Statement and you must file IRS Form 5695 along with your tax return. Be sure to save your receipts and the Manufacturer's Certification Statement for your records. The IRS encourages manufacturers to provide these certifications on their websites to facilitate identification of qualified products.
Biomass stoves used to heat water, solar panels, wind energy systems and fuel cells are also eligible for the tax credit of 30 percent of the total cost (product + installation) up to $1,500.
Consumers are not eligible for tax credits or deductions when they purchase more common household appliances with the Energy Star logo such as washers and dryers, refrigerators and dishwashers. Manufacturers of these appliances, however, are eligible for tax breaks, under the premise that they will pass the savings on to you by offering increased availability of products as well as price reductions for energy-saving appliances.
Many states offer financial rewards, either in the form of tax credits, tax deductions, rebates or low-interest loans, to help and encourage those who want to replace or purchase energy-efficient home appliances. Links to two websites that will provide you with state-specific details are listed in the Resources section below.
Tax Credit vs. Tax Deduction
From a consumer standpoint, a tax credit is actually more valuable than an equivalent tax deduction. This is because with a tax credit you get a dollar-for-dollar reduction, while with a tax deduction only a percentage of your owed tax is reduced. A tax credit allows you to list purchases on your federal tax return to lower the amount of total taxes owed to the IRS.