Energy bill brings tax breaks

Energy bill brings tax breaks
Buyers of hybrid vehicles, homeowners could cash in

Cox News Service

August 21, 2005

ATLANTA — The energy bill, which President Bush signed into law two weeks ago, has $14.5 billion in tax breaks, including a handful of goodies for ordinary people.

But don't get too excited. There are breaks for home-owners and car buyers. But they are smallish, and each one has some kinks in it.

Recent Hank columns:

More "Bank on Hank"

Here is a big kink: Home-owners can claim tax breaks for certain improvements — but only if they do the work during 2006 or 2007. That means if you hurry up and install energy-efficient windows this year, you will be out in the cold, tax-wise. Same thing if you wait until 2008.

Here is a second, little-noticed catch: If you pay the alternative minimum tax, you are not eligible for any of these credits.

"The main reason was to limit the revenue expense of all these provisions," said George G. Jones, a senior analyst at CCH, a leading publisher of tax information and analysis. That is, Congress didn't want to cut back too much on total tax collections.

Another reason for the complexity was to avoid creating loopholes. "To plug the loopholes, you have to include a lot more fine points," Jones said.

All this means that you may have to ask a CPA, as well as the guy who sells windows, solar energy gadgets or hybrid automobiles, to find out for sure if you're entitled to a tax break.

Home fix-ups: You can get up to $500 in credits for specified energy conservation measures. But there are four categories of improvements, and each has its own maximum benefit.

For example, you can claim a credit of no more than $200 for installing energy-conserving windows. Note that your credit for windows, as well as doors, insulation and some other items, is limited to 10 percent of your total spending for these improvements.

Also: You have to make the installations during 2006 or 2007.

Also: Your basis in the house is reduced by the amount of any credits you take.

The rest of the $500? You will have to buy and install certain kinds of equipment in those three other categories. Put in advanced main air circulating fans, for example, and you can get a credit of no more than $50. In a third category, certain furnaces and hot water heaters can earn you a tax credit. Energy-efficient heat pumps and central air conditioning equipment are the fourth category.

Other home energy-savers: There's a separate credit for solar water heaters, solar electricity generating equipment and fuel cell equipment.

It's complex, so individual taxpayers may need to ask for expert help on this one. To give you an idea, the maximum tax credit for installing a solar water heater is $2,000 in 2006 or 2007. The limits are different for some other kinds of equipment.

Other kinks:

You can claim the credit only in a year in which you install the equipment.

Your credit can't be more than 30 percent of your total spending.

You can't get the credit for equipment installed on swimming pools or hot tubs.

Hybrid cars. Under the new law, buyers of hybrid cars may get credits of up to $3,400. That's a change from the current law, and it gives a bigger incentive to buy green.

The maximum benefit is higher than under current law.

But the main incentive is that the new law gives you a credit, which is subtracted directly from the amount of tax you owe. The current law provides for deductions, which are subtracted from your taxable income.

But don't forget the kinks.

The credit could be much less than $3,400. It depends on how much better mileage your hybrid gets compared with earlier models and on the total amount of gas you can be expected to save over its lifetime.

You have to wait till 2006, when the credit comes into effect. The credit expires at the end of 2009 for hybrid autos.

Here's the big one: The full credit is assured only for the first 60,000 vehicles sold by any given manufacturer. After that, the amount of the credit declines for a year, then disappears.

If you want a Toyota or Honda, companies that already sell a lot of hybrid automobiles, you need to think about acting quickly next year.

In any case, shoppers should ask the car dealer what credits are available.

New home construction. A contractor can get a credit of $2,000 for building a house that meets certain criteria for energy efficiency.

But: The contractor may or may not decide to pass along the savings to a buyer.

Also: The contractor has to sell the house for residential use, and the credit is available only in 2006 and 2007.

Got all that? Congratulations, but you're not out of the woods yet. For more details, go to tax.cchgroup.com /tax-briefings/2005-07 -Highway-Energy.pdf. Click on "Read the full CCH Coverage" to download a more complete explanation.

Read more "Bank on Hank" columns