Income Tax Deductions for Energy Savings

Making energy-saving improvements on your home will not only save you money on your energy bill, those improvements may help you save even more on your federal tax return. The IRS offers several tax deductions that you may be eligible for if you made improvements to reduce your home’s heating and cooling costs.

Non-Business Energy Property Credit

The American Tax Relief Act extended the non-business energy property credit as of 2013, which means you may be eligible for a credit of 10 percent, up to $500, of the costs of qualifying energy-saving home improvement projects. The act also made the credit retroactive, so you can claim the credit for improvements made during qualifying prior years. According to the Internal Revenue Service, qualifying improvements includes, adding insulation, energy-efficient exterior windows and doors and certain roofs. You cannot figure the cost of installing these items in the costs. However, if you install certain high-efficiency items, like heating and air conditioning systems, you can figure in installation costs. The non-business energy property credit has a lifetime limit of $500.

Residential Energy Efficient Property Credit

If the energy-saving improvements you made to your primary or secondary residence involved alternative energy equipment, you may be eligible for the residential energy efficient property credit. Alternative energy equipment includes, solar water heaters and electricity equipment, fuel cell equipment and wind turbines. Taxpayers can claim 30 percent of the cost of alternative energy equipment plus installation and labor costs. Unlike the non-business energy property credit, there are no limits on the amount of this credit except for fuel cell equipment.

Qualified Improvements

All energy-saving improvements do not qualify for these credits, so taxpayers should make sure the equipment and material meet the requirements established by the U.S. Department of Energy. Look for the Energystar certificate to verify that the equipment and material meet the standards or check the manufacturer’s certificate to see whether the equipment qualifies. Taxpayers also can check online at the Energystar website.

Claiming the Credits

To claim these credits, tax filers must file IRS Form 5695 with their 2012 federal income tax return. Form 5695 and instructions for completing the form can be found at the IRS website. Also, homeowners who itemize and claim other home improvement deductions can still claim both credits.