IRS Releases Guidance on Energy Efficiency Tax Credits

March 1, 2006

The U.S. Internal Revenue Service (IRS) issued guidance on February 21st on the tax credits for new energy efficient homes and for energy efficiency improvements to existing homes, as established by the Energy Policy Act of 2005. A credit of up to $2,000 is available for eligible contractors who build a qualified new energy efficient home and sell it either this year or next. The credit is available for all new homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards. See the IRS press release and the guidance for traditional homes (PDF 25 KB) and manufactured homes (PDF 36 KB). Download Adobe Reader.

For existing homes, the law provides a 10 percent credit for buying qualified energy efficiency improvements, including insulation, reflective metal roofs, insulated exterior doors, and energy efficient exterior windows and skylights. The law also provides residential tax credits of $50 for each advanced main air circulation fan and $150 for qualified furnaces or hot water heaters fueled with natural gas, propane, or oil. That credit increases to $300 for qualified heat pump water heaters; high-efficiency water heaters, boilers, furnaces, and central air conditioners; and geothermal heat pumps. To earn the credit, the improvements must be made this year or next year. The maximum credit for both years is $500, of which expenses for windows can provide no more than $200. Manufacturers of these products may certify them as eligible for the tax credits, in which case the homeowner can rely on the certification to claim the credit. See the IRS press release and the full IRS guidance (PDF 37 KB). Download Adobe Reader.

To help homeowners take advantage of the energy efficiency tax credits, the Alliance to Save Energy (ASE) has created a special tax credits Web site. ASE has also issued state-by-state energy saving tips for 37 states and the District of Columbia, and has published a free consumer booklet of energy saving tips called "Power$mart: The Power Is In Your Hands." See the ASE Energy Efficiency Tax Credits Web site, the ASE press release and Web site for the state-by-state energy tips, and the ASE press release and Web site for the Power$mart booklet.