genesis@ihu1e.UUCP (Russ Sehnoutka) (12/11/84)
Reprinted entirely from the 1985 Edition of J. K. Lasser's
"Your Income Tax", prepared by the J. K. Lasser Tax Institute,
edited by Bernard Greisman, published by Simon and Schuster.,
$6.95 (tax-deductible).
RESIDENTIAL ENERGY CREDIT
There are two distinct credits for home energy conservation
expenses.
Credit for energy conservation expenditures, such as insulation. It
is 15% of up to $2,000 of expenses (maximum $300 credit).
Credit for renewable energy source expenditures, such as solar
energy conductors. It is 40% of up to $10,000 of expenses (maximum
$4,000 credit).
The credits are figured separately, but general rules relating to
minimum credits and carryovers apply to both. Only expenses
incurred for your principal residence, whether owned or rented,
qualify. Energy improvements to a summer or vacation home do not
qualify. See Section 29.21 for definition of a principal
residence.
The credits are figured on Form 5695. Further details are
discussed in the following sections:
Business energy credit ---------------- See 5.70
energy conservation expenditures ------ See 24.30
Renewable energy source expenditures -- See 24.31
Figuring the credit ------------------- See 24.32
The credit for energy conservation expenditures may be claimed only
for installations in a principal residence if construction was
substantially completed before April 20, 1977.
24.30 * ENERGY CONSERVATION EXPENDITURES
A 15% credit of costs up to $2,000 (for a maximum credit of $300)
may be claimed for the original installation of insulation and
other energy-conserving components with a useful life of at least
three years. The credit applies to your payments for: (1)
insulation for ceilings, walls, floors, roofs, and water heaters;
(2) furnace replacement burner, designed to reduce the amount of
fuel consumed as a result of increased efficiency (the burner must
replace an existing burner; it does not qualify if it is acquired
as a component of, or for use in, a new furnace or burner); (3) a
device for modifying flue openings in heating systems which
increase efficiency; (4) an electrical or mechanical furnace
ignition system which replaces a gas pilot light; (5) storm or
thermal windows or doors for the exterior of a dwelling; (6)
automatic energy-saving setback thermostats; (7) caulking and
weatherstripping of an exterior door or window; and (8) a meter
which displays the cost of energy usage.
The IRS has the discretion to add qualifying items if they meet the
standards set by the Windfall Profit Tax Act.
Home improvements **not** qualifying for the credit: Carpeting,
drapes, and wood paneling; exterior siding (such as aluminum
siding); heat pumps; wood or heat fueled residential equipment
(which includes fireplaces and woodburning stoves); fluorescent
replacement lighting systems; replacement boilers and furnaces; air
conditioners; heat reclaimers; power factor improvers; attic of
whole house fans; films or coatings applied to surface of windows
or doors; greenhouses; expenditures for a swimming pool used as an
energy storage medium; and hydrogen fueled residential equipment.
An IRS certification that an item qualifies as insulation does not
certify that it meets the useful life test.
24.31 * RENEWABLE ENERGY SOURCE EXPENDITURES
A credit of 40% of costs up to $10,000 (for a maximum credit of
$4,000) may be claimed for solar, wind, or geothermal devices, or
devices from other renewable energy sources as specified in
Treasury regulations, which provide hot water or electricity for
use in the home or for heating or cooling the home. The original
use of the unit must commence with you and must be reasonably
expected to last for at least five years.
Solar Energy Property.
Both active and passive systems qualify for the renewable energy
source credit. An active solar energy system is based on the use
of mechanically forced energy transfer, such as the use of fans or
pumps to circulate solar generated energy; a passive solar energy
system is based on the use of conductive, convective, or radiant
energy transfer.
A passive solar energy system must contain all of the following:
(1) a solar collection area; (2) an absorber; (3) a storage mass;
(4) a heat distribution method; and (5) a heat regulation device.
Materials and components of a solar energy system that have a
significant structural function or are structural components of a
residence do not qualify as solar energy property. An exception is
made for solar roof panels, which qualify for the credit.
The credit may be claimed for an old or newly constructed principal
residence.
24.32 * FIGURING THE CREDIT
The maximum energy conservation credit is $300 per residence, 15%
of up to $2000 of qualifying expenditures. The maximum renewable
energy source credit is $4,000, 40% of up to $10,000 of costs, per
residence. The credits are figured separately; the total maximum
credit is $4,300. A credit of less than $10 is not allowed.
Example
In 1983 a homeowner installs $1,500 of installation and claims a
$225 credit (15% of $1,500). In 1984, he installs $2,000 of
additional insulation and storm windows; his 1984 credit is $75
(15% of $500) although he expended $2,000. No more than the
maximum of $300 may be claimed for the residence.
Do not include the cost of qualifying energy conservation items or
renewable energy source property that has been paid for with
subsidized funds from a governmental energy program. In addition,
the $2,000 limit on energy conservation costs and the $10,000 limit
on renewable energy source costs must be reduced by the sum of (1)
the costs financed by subsidized energy financing, and (2) the
amounts of any nontaxable federal, state, or local government
grants used to buy energy conservation items or renewable energy
source property.
If a homeowner claims the maximum credit on his house, then sells
it and buys a new residence, the credit claimed on the old
residence does not affect the potential credit for the new
residence; a maximum of $300 may be claimed on the new residence.
Similarly, the buyer of the old residence may also claim a maximum
of $300, even though the seller already claimed the maximum credit
for insulation to that house. Finally, since the residential
energy credit and the renewable energy source credit are figured
separately, expenditures for one type of credit do not reduce the
other credit.
The credit is added to the dependent care, elderly, and political
contribution credits. If the allowable energy credit exceeds tax
liability reduced by the other three credits, the excess is carried
over to the succeeding year but not beyond 1987.
Keep records that clearly identify the energy-conserving components
and renewable energy source property as well as substantiating the
costs, including any labor costs. If labor costs are allocated
between energy-saving and ordinary improvements, record the method
of allocation.
The basis of your home may not be increased to the extent of the
credit; this is an exception to the rule in Section 29.24.
Joint ownership of energy saving items used by two or more
residences.
Where two or more individuals jointly purchase energy saving
devices that benefit their separately owned residences, each may
claim the full credit. The amount of the credit for each
individual is figured according to his contribution toward the
purchase.
Where a residence is owned jointly by two or more individuals, the
total credit claimed by the joint owners is limited to the $300
maximum for energy conservation expenses and $4,000 for renewable
energy source expenses.
Business use of your home.
If you use a portion of your home for business, an allocation may
be required. Where less than 80% of the use of an energy saving
item is for residential purposes, only the portion of the item
allocable to residential use qualifies for the credit.
Examples
(1) Smith installs storm windows at a cost of $3,000. Half the
windows are on the portion of the house used for residential
purposes; the other half are on the part used as an office. Only
$1,500 (50% of $3,000) qualifies for the credit.
(2) Same as above except 90% of the windows are on the portion of
his house used for residential purposes and 10% are for his office.
The entire $3,000 qualifies since at least 80% of the windows are
for personal residential purposes.
--
Russ Sehnoutka --------- AT&T Bell Laboratories
ihnp4!ihu1e!genesis ------ Naperville, Illinoiswmartin@brl-tgr.ARPA (12/18/84)
The referenced posting (from Lasser) discusses furnaces but seems to avoid discussing water heaters. It mentions INSULATION for water heaters, as: > The credit applies to your payments for: (1) > insulation for ceilings, walls, floors, roofs, and water heaters; and it specifically DISALLOWS replacement "boilers": > Home improvements **not** qualifying for the credit: > replacement boilers and furnaces; However, to me, a "boiler" is not a water heater for domestic hot water use; it is a part of a hot-water heating system, independent of the production of hot water for washing, bathing, etc. (Though I admit that I have heard of weird systems where the two are combined.) So, my question is: Is a replacement of an old domestic water heater with a newer, more-energy-efficient model something that qualifies for the energy credit? If not, why omit the words "water heater" from the list of specific exclusions? After all, it is a common appliance and replacing it is more usual than the replacement of a furnace, or some of the other items listed in the specific exclusions. Or does the "official IRS definition" of the word "boiler" include "domestic hot water heater"? Will Martin USENET: seismo!brl-bmd!wmartin or ARPA/MILNET: wmartin@almsa-1.ARPA