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Going green this St. Patrick's Day with renewed residential energy tax credits

Millions of Americans are at home now, sheltering in place in order to slow down spread of the coronavirus.

One of the side effects of spending more than normal time in your house is that you discover issues. And one of those issues might be, depending on where you live, that your heating or air conditioning system is not in the greatest shape.

Maybe you need a completely new unit. I feel your pain. We've had to replace AC systems and it sucks, from both the cost and inconvenience perspectives.

Or perhaps you can get by with some less-invasive home climate adjustments.

Either way, the retroactive renewal back in December of some tax credits for residential energy improvements might be able to help.

That's why this week's St. Patrick's Day edition of Tax Form Tuesday looks at a tax-related, saving o' the green issue, the Residential Energy Credits that can be claimed by filing Form 5695 with your tax return.

More elaborate energy-saving efforts: The two-paged Form 5695 has, fittingly, two parts.

The first, an excerpt of which is shown below, covers page 1, an excerpt of which is shown below. This is where you claim the tax benefits of the Residential Energy Efficient Property Credit. This tax break has been in place since 2016, renewed in 2018 and runs through 2021.

Form 5695 Part 1 residential energy efficient property credit
Click image to see the full Form 5695


The available tax credits, which phase down each year, are:

  • 30 percent for systems placed in service by Dec. 31, 2019;
  • 26 percent for systems placed in service from Jan. 1 through Dec. 31, 2020; and
  • 22 percent for systems placed in service from Jan. 1 through Dec. 31, 2021.

This larger tax credit is because these are more extensive and expensive renewable residential energy options. Covered systems include qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property and certain fuel cell and microturbine property.

There's no cap on the eligible components to which the credit applies. It also covers any labor costs you pay for the preparation, assembly and original installation of the energy efficient property on your home, as well as for piping or wiring to interconnect such property to your house.

The credit applies to existing homes, both your primary residence and a second home, as well as to new residential construction.

You can find more on the allowable systems in Form 5695 instructions, as well as from your tax software, your tax professional and the Energy Star website.

Smaller scale home energy projects resurrected: A second group of residential energy-efficient tax breaks include many common home energy systems, such as our heating, air conditioning and water systems, as well as some relatively easy energy efficient upgrades like new exterior doors and windows or simply adding some insulation.

These home energy systems are more traditional, but they've led a more tumultuous legislative life.

Home energy tax breaks have been around in some form since the early 1980s. They got a major boost in 2005 with the enactment that year of the Energy Policy Act (EPA; cute acronym, no?).

They were renewed and added to the 2008 financial crisis bailout bill, aka the Emergency Economic Stabilization Act, and significantly expanded in 2009 as part of the Obama Administration's American Recovery and Reinvestment Act.

Since then, these less expansive but popular home energy improvements have been tweaked and renewed as part of the temporary tax breaks known as extenders. That happened again on Dec. 20, 2019, when the latest version of extenders, including these energy upgrades, were signed.

So that we don't have to mess with more amended filings, the latest extenders bill approved the so-called Nonresidential Energy Tax Credits through 2020.

Claiming renewed energy improvement credits: Page 2/Part 2 of Form 5695, an excerpt shown below, covers these renewed residential energy-efficient tax breaks, known collectively as the Nonbusiness Energy Property Credit.

Form 5695 Part 2 nonbusiness energy property credit
Click image to see the full Form 5695


These home improvements are, for tax credit purposes, divided into two categories. This is because they vary depending on what you do to make your home less of an energy hog and that means they get different tax break limits.

First, there are what the Internal Revenue Service has designated as energy efficiency improvements. They include home insulation; exterior doors, windows and skylights; and certain roofing materials and are entered on the various alphabetic sublines of line 19. You can count 10 percent of these upgrade costs toward the credit.

Then there are what are known as residential energy property costs. These costs, plus fees for labor and installation, include electric heat pumps; electric heat pump water heaters; central air conditioning systems; natural gas, propane or oil water heaters; natural gas, propane or oil furnaces; natural gas, propane or oil hot water boilers; advanced circulating fans for natural gas, propane or oil furnaces; and stoves that use biomass fuel.

There's no percentage cap for these items, which are entered on line 22a, b or c of Part 2 of Form 5605. But there is a dollar limit, again depending on the upgrade, ranging from $50 to $150 to $300.

Credit claims capped: But wait, there's more, or actually potentially less.

The most you can claim for all of your Nonbusiness Energy Property Credit is $500. There also are further limits on how those claims are parceled out. The maximum allowable amounts within that overall $500 maximum credit are:

  • $50 for a furnace circulating fan,
  • $150 for a furnace or boiler,
  • $200 for windows, and
  • $300 for any other single residential energy property cost.

Plus, that $500 limit includes any claim you've previously made here since this version of the energy tax credit took effect with the 2006 tax year.

Yes, it can be confusing because taxes. But it could be worth a talk with your tax preparer, a look at this section of your tax software or a check of the Energy Star specifics on nonbusiness energy tax credits to determine whether you qualify and for how much.

Retro renewal might mean amending: Finally, note the timing of the renewal of the Nonbusiness Energy Property Credit claimed on page two of Form 5695.

Since these residential energy upgrade tax credits had expired at the end of 2017, they weren't available to taxpayers in 2018. The late-2019 tax extension measure, however, made them retroactive to the 2018 tax year.

So if your home improvements last year included some of these green energy moves, you'll need to file an amended return to claim them.

And since there's a lifetime limit on the credit amount that you can take, if you're claiming the Nonbusiness Energy Property Credit for both the 2018 and 2019 tax years, you'll must complete your 2018 amended return with that year's Form 5695 claim first.

Pot of Gold St Patricks Day
Gold vector created
by pikisuperstar - www.freepik.com

Not a lot of tax gold, but…: I know, right about now you're wondering if it's really worth all that trouble for possibly not that much of a tax break. Personally, I say yes.

Remember, this is a tax credit, a dollar-for-dollar reduction of any tax you owe. That effectively means more money in your pocket instead of Uncle Sam's bank account. That's always a win in my book. And heck, even just $50 off your taxes means you'll have $50 you can spend on something you want or need.

That's always something worth toasting, especially with a green — for energy and cash savings, too — beer on this St. Paddy's Day.

You also might find these items of interest:

 

Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.

But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

 

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