Stimulus plans brings green home improvement tax breaks

Incentives encourage homeowners to embrace energy efficiency.

Energy-saving systems for the attic, basement, and in between have effectively gone on sale, courtesy of the United States Congress.

But whether shoppers will take advantage – or even notice available discounts – remains an open question.

Tax incentives to encourage investments in energy efficiency took effect last week when President Barack Obama signed the $787 billion economic stimulus bill. That means homeowners with drafty windows, old heating systems, or other root causes of high energy bills can be rewarded in tax season if they make improvements in 2009 or 2010.

"This is by far the most the federal government has done in the past several decades" to reward energy-efficiency investments, says Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, a nonprofit organization in Washington, D.C. "In many cases, this will make the high-efficiency product cheaper than the low-efficiency product. [For consumers], this is pretty lucrative, and I'd be surprised if it gets extended into 2011."

New incentives increase the size of tax credits for homeowners who buy qualifying products. For instance, those who invest in highly-rated insulation, replacement windows, duct seals, or high-efficiency heating and cooling systems can now receive a tax credit worth 30 percent of the upgrade cost (maximum credit value: $1,500).

Previously, homeowners could get a tax credit worth just 10 percent of an upgrade cost, up to a maximum of $500. Now, taxpayers who spend $800 on an efficient water heater, $1,000 on insulation, and $2,000 on windows could lop $1,140 off their federal tax bill.

Awards for switching to renewable energy sources have become especially generous. Congress this month did away with caps on 30 percent tax credits for homeowners who install solar panels, geothermal heat pumps, or windmills. Now a $24,000 investment to make a home solar-powered would generate a federal tax credit worth $7,200. (Before the stimulus, credits were capped at $2,000 for geothermal and solar; $4,000 for wind).

These tax code revisions have altered the affordability ballgame, says Craig Perkins, executive director of the Energy Coalition, a nonprofit in Irvine, Calif., that helps consumers become more energy-efficient. He estimates more than 1 in 4 Californians can now borrow to install solar panels and immediately be paying less out-of-pocket per month (including payments on solar panels) than if he or she were to keep getting power from conventional sources. Others, he says, will often recoup the costs of adding solar or high-efficiency air conditioning over a few years.

One key to maximizing savings, Perkins says, is to choose projects that qualify for a rebate from one's state or utility and are also eligible for a federal tax credit. Such "piggybacking" is both permissible and encouraged. The challenge: getting consumers to research options and take action.

"The problem we find constantly is that [navigating incentives] can be extremely confusing," Mr. Perkins says. "People don't want to become wonks about what's eligible and what isn't.… It's the nuts and bolts of making it happen that really stops a lot people."

Merchandisers are already moving to educate consumers about new tax benefits. At Home & Hearth, a heating stove dealer in Hampton Falls, N.H., manager Bob King was talking up tax credits with every customer hours after Congress passed the stimulus bill. Brochure in hand, Jim Marshall of Exeter, N.H., liked hearing from Mr. King in the store's parking lot that a new wood pellet stove would qualify. He'd like to make a switch and stop spending more than $300 per month for oil heat.

Burning pellets made from sawdust and other wood byproducts "doesn't hurt the environment," Mr. Marshall says. "You're just using something that would be thrown away. And if they'll give me a tax credit for one of these stoves, I'll look at doing it sooner."

Home energy experts often recommend people first invest in eliminating wasted energy. That includes tightening a building's shell with attic insulation and other sealing measures before investing in new mechanical equipment.

Mr. Nadel suggests consumers with questions about priorities contact a contractor trained by the federal Home Performance with Energy Star program. He or she will analyze, sometimes at no cost, how to align a particular home's needs with available tax incentive and rebate programs.

In these tough economic times, consumers shouldn't necessarily cling to conventional wisdom. Since contractors need work, homeowners might find that well-priced labor will catapult a systems upgrade to the top of a home-improvement priority list, according to Alan Meier, associate director of the Energy Efficiency Center at the University of California, Davis. What's more, he says, the new federal push for renewable energy could affect a homeowner's calculus, especially in states with aggressive incentives of their own.

"The federal government wants you to invest in solar and other renewables," Mr. Meier says. "Given all the tax credits, it may in fact make solar panels more cost-effective for the consumer than energy conservation," such as adding insulation or highly rated windows.

Outside the home, hybrid vehicle owners have new reason to soup up their rigs. Plug-in conversion kits, which replace existing batteries with larger ones that plug into electrical outlets, now generate tax credits worth 10 percent of the kit's cost (maximum credit value: $4,000). Congress this month also increased the number of new hybrid plug-in vehicles, expected to debut in showrooms later this year, which will qualify for tax credits worth anywhere from $2,500 to $7,500, depending on battery size.

No matter which investments consumers choose, the process of claiming benefits may require perseverance. King, the heating stove dealer, says he's received calls this year from accountants who had mistakenly challenged their clients for wanting to claim tax credits on stove purchases. Other accountants note consumers aren't always sufficiently organized or diligent to claim what's due to them.

"This is a very unique and narrow bunch of credits," says Mark Steben, vice president of tax resources at Jackson Hewitt Tax Service. "You're going to see a large group of people who qualify but don't take advantage of it."