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Seal in new tax credits for making your home energy efficient

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in Small Business Tax

Thanks to a new law, you can take a lifetime tax credit of up to $500 for the cost of energy-efficient improvements to your home. The key word is “credit,” which is a dollar-for-dollar reduction of your tax bill … much better than a simple deduction.

Advice: Take it while it’s hot. You have only two years—2006 and 2007—to make energysaving improvements to your home that qualify for the tax credit.

The IRS just released new blueprints that clarify how you can claim this tax break. IRS Notice 2006-26 also adds several key provisions that you should know about.

Here’s the whole story: The new law, passed in 2005, says you can claim the energy tax credit (also called the Section 25C credit) for qualified home improvements that are placed in service after Dec. 31, 2005, and before Jan. 1, 2008.

The two-part credit equals 10 percent of the cost of energy-efficiency improvements to the “building envelope,” plus 100 percent of your qualified residential energy property expenses. But the 10 percent part of the credit combined with the 100 percent part can’t exceed the lifetime $500 cap.

Those energy-efficiency improvements must be installed in your principal residence and be reasonably expected to last at least five years. Only dwellings in the United States qualify, and you must be the original user of the improvement product. The list of energy-efficient home improvements eligible for the 10 percent part of the credit includes:

  • Insulation materials or systems primarily designed to reduce heat loss or gain.

  • Exterior windows, skylights, storm windows (in combination with an exterior window) or doors that meet certain requirements (limited to a maximum $200 credit).

  • Qualified storm doors used in combination with a wood door.

  • Any metal roof that has the appropriate coatings designed to reduce the heat gain and meets the Energy Star requirements. The list of residential energy property expenses eligible for the 100 percent part of the credit includes:

  • $50 for each advanced main air circulating fan.

  •  $150 for each qualified natural gas, propane, or oil furnace or hot water heater.

$300 for each item of qualifying energy-efficient building property, which includes a variety of heat pumps, air conditioners, water heaters, furnaces and fan components carrying specific efficiency ratings.

The IRS notice contains detailed technical requirements for qualified improvements and spells out the complex certification procedures for the credit.

For more information, contact Jennifer Bernardini, (202) 622-3120.

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