Energy Tax Credits

• A taxpayer claims the Residential Energy Property Credit for improvements he makes to his existing home such as purchasing new appliances, adding insulation or energy efficient windows and replacing heating and air conditioning systems with energy efficient versions. The Residential Energy Efficient Property Credit enables a taxpayer to claim the credit when he purchases alternative energy equipment. These include solar panels and water heaters, fuel cells, wind energy devices and geothermal heat pumps.
  
  

Credit Limits

• The limits on the two types of energy tax credits are different. For the Residential Energy Property Credit, the rate of the credit is 30 percent of the cost of all qualifying improvements. But, there is a cap of $1,500. For the Residential Energy Efficient Property Credit, the same 30 percent credit applies, but there is no cap on the amount that a person qualifies for. In this case, the taxpayer can claim a credit for each type of alternative energy equipment he buys.
  
  

Using Tax Credit

• The first tax credit holds an annual tax limit, so no matter how many changes the taxpayer makes he can only claim up to $1,500. The second, however, has no annual limit. Therefore, if the taxpayer purchases two types of alternative fuel devices, he multiplies the total cost of each by 30 percent separately and then adds them together. For example, if he purchases solar electric property for $7,000 and a geothermal heat pump for $5,500, his tax credit would be $2,100 plus $1,650, which equals $3,750 total.
  
  

Tax Liability And Carryover

• The energy tax credits are nonrefundable credits, meaning no refund is given if the credit exceeds the taxpayer's tax liability, or what they owe in a tax year. For this reason, the Internal Revenue Service allows the taxpayer to carry forward the excess into the next tax year. Using the example, if the taxpayer's tax liability for that year is $2,400, he carries forward the remaining $1,350 to reduce his tax liability in the subsequent year.