Understanding the Federal Tax Credit for Energy Efficient Heating and Cooling

Understanding the tax credits offered to American taxpayers meant to defray heating and cooling costs while encouraging the installation of energy efficient systems can be difficult. The tax credits change on a yearly basis and often very little guidance is issued along with the rules, leaving taxpayers to guess at what is and is not covered. 

For 2011, the government seems to have made the system very confusing.  Unlike 2009 and 2010 the $1500 tax credit for installing various systems has disappeared. During the last days of 2010, however, it added a package of less-generous but still useful energy tax credits for heating and cooling systems

In general, the federal government now offers a lifetime tax credit of a maximum of 10 percent of the cost of a new heating or cooling system. This credit cannot exceed $500 for all of the energy improvements combined. Since this is a lifetime credit, if a consumers tax bill does not exceed the credit being offered for their energy improvement, the credit can be transferred to the next tax year. 

If improvements are spread out over several years, the total credit claimed cannot exceed $500. In other words, if a consumer purchases $3000 worth of improvements this year, he or she would be able to claim a $300 tax credit. If that same consumer also purchases $3000 next year, however, he or she would only be able to claim $200, since he or she would have reached their credit ceiling. The ceiling, by the way is retroactive, so if a consumer got $500 or more back during 2009-2010, they would get nothing for any 2011 improvements.

Keep in mind, though, that although there is a $500 overall ceiling, in 2011 some improvements have individual limits below $500.  For example, the maximum credit allowed for any advanced main air-circulating fan is $50. The maximum credit for any qualified natural gas, propane, or oil furnace or hot water boiler is $150. There is also a cap of $300 for any qualified item of energy-efficient building property. These items can include electric and geothermal heat pumps, central air conditioning systems, and natural gas, propane, or oil water heaters.  Installation costs for these systems are considered separate and can be counted towards the credit. So a ceiling fan that costs $700 plus $100 for installation would only qualify for a $50 tax credit, but an additional $10 could be claimed for its installation.

Of course, all receipts should be saved as proof that the tax payer qualifies for these credits, and all of the installation must be completed before December 31, 2011 in order to qualify.  Be sure to check the Energy Star website for more information and guidance for which systems are covered.