Your Home: Tax Credit Guide
Tax Credits for Replacing Windows, Doors, and SkylightsDO YOU QUALIFY:
• Your windows are drafty or more than 15 years old.
• You install qualifying replacements in 2009 or 2010.
• You haven't already maxed out the energy tax credit on other upgrades.
Does it feel like money is escaping through your home’s drafty windows, doors, and skylights? You might be able to keep at least some of that cash in your pocket by taking advantage of federal energy tax credits for retrofitting your house with qualified energy-efficient replacements. You can claim a tax credit of up to $1,500 for upgrading the windows, exterior doors, and skylights in your primary residence during 2009 and 2010.
The credit is based on 30% of the cost of materials, so a $5,000 purchase would max it out. But a tax credit alone isn’t reason enough to start calling contractors. Do a little homework first. The true value of replacing aging windows, doors, and skylights isn’t always an open-and-shut case.
Follow the 15-year rule for windows
A good rule of thumb for window replacement: Don’t bother if they’re less than 15 years old, says Jim Rooney, a home inspector in Annapolis, Md. The savings on your energy bills likely will be negligible since window technology hasn’t changed that radically and the integrity of your windows should still be intact. Shoddy installation or poor manufacturing may call for exceptions to the 15-year rule. Windows that are 20, 30, or more years old are prime candidates for replacement.
Most of your focus should be on windows, since they’re more numerous, but skylights are notorious for energy loss too, not to mention water leaks. Exterior doors tend to outlast windows, so keep them unless the upgrade is purely for aesthetic reasons. Besides, weather stripping and snug sweeps can boost the energy efficiency of exterior doors for a whole lot less money.
Adding up the costs—and savings
With windows, doors, and skylights, you get what you pay for. Expect to shell out between $500 and $1,000 per window including installation, or about $10,000 total for a moderately sized house of about 2,000 square feet. New energy-credit-qualified doors and skylights are also in the $500 to $1,000 range, including installation.
Tom Herron, of the National Fenestration Rating Council, says products on the higher end of the cost scale are usually better constructed and more energy efficient. NFRC is a non-profit organization that administers the rating and labeling system for the energy performance of windows, doors, and skylights.
It could take years to recoup the upfront costs, but you should see an immediate reduction in your energy bills. In general, you’ll save $126 to $465 a year if single-pane windows in a 2,000 square foot house are replaced with tax-credit-eligible windows, according to the Efficient Windows Collaborative, a trade group. That’s 15% to 40% off the typical energy bill.
Do my replacements qualify?
A label alone doesn’t guarantee your new windows, doors, and skylights qualify for the energy tax credit, but it does provide critical information related to eligibility. To qualify, windows, doors, and skylights must have a U-factor of 0.30 or less and a Solar Heat Gain Coefficient (SHGC) of 0.30 or less. The U-factor measures how well a product prevents heat from escaping, and the SHGC gauges how well a product blocks heat from the sun. Labels also carry information on light transmission, air leakage, and condensation resistance.
Herron, of the NFRC, says about 80% to 85% of the manufacturers in North America provide NFRC labels. All Energy Star qualified windows carry an NFRC label, according to Energy Star, a joint program of the U.S. Department of Energy and the U.S. Environmental Protection Agency that promotes energy-efficient products and practices.
Resist the urge to trim costs by purchasing cheaper windows, doors, and skylights with poor U-factor and SHGC ratings. Not only will you miss out on the tax credit, energy bills won’t come down much.
Taking advantage of the tax credit
A credit is especially valuable because it directly reduces the amount of tax owed, as opposed to a deduction, which lowers the amount of taxable income. To be eligible for the full credit you must owe more in federal taxes than you’re trying to claim. Use IRS Form 5695 to take advantage of the credit, which is cumulative for 2009 and 2010 only. You can’t claim $1,500 for each tax year, but you can spread the $1,500 over the two-year period.
Uncle Sam may want proof that your new windows, doors, and skylights meet energy-efficiency standards, so be sure to save receipts, product stickers, and certification statements. The latter can often be found on packaging or manufacturers’ web sites. As for receipts, ask contractors to itemize expenses. Installation costs aren’t eligible for the credit; only materials are.
Keep in mind that a variety of energy-efficiency improvements to your existing home, including insulation, roofs, and HVAC, count toward the credit limit. You can’t claim separate $1,500 credits for each upgrade, nor can you claim the credit for a newly built home. Matt Golden, president and founder of San Francisco-based Sustainable Spaces, says homeowners can often lower energy costs for a lot less, and still get the tax credit, by insulating attics instead.
Tax Credits for Replacing Heating and Cooling Systems
• Your HVAC system is at least 10 years old.
• You install a qualifying replacement in 2009 or 2010.
• You haven’t maxed out the energy tax credit on other upgrades.
Replacing an aging heating and cooling system can save you money on energy costs. According to Energy Star, the federal government’s program to promote energy-efficient products and practices, the average household spends about $1,900 a year on energy bills, with about half of that amount going toward heating and cooling. Upgrading your heating, ventilation, and air conditioning (HVAC) to energy-efficient units can cut utility costs by about 20%, or $200 annually, on average.
This type of home improvement doesn’t come cheap. Prices vary widely based on where you live, unit specifications, and the condition of your home, but figure a high-efficiency furnace will start at around $3,500, including installation, estimates Corbett Lunsford, executive director of Chicago-based Green Dream Group. A standard furnace may cost $2,400. To help offset the price difference, the IRS allows a tax credit worth up to $1,500 on eligible HVAC systems put into service during 2009 or 2010. Consult a tax advisor.
Pay attention to efficiency ratings
To earn an Energy Star rating, furnaces must be more efficient than standard units, with annual fuel utilization efficiency ratings, or AFUE, of 85% for oil furnaces and 90% for gas furnaces. The Energy Star seal of approval alone isn’t enough to garner the federal tax credit. Credit-eligible gas furnaces (either natural gas or propane) must have AFUE ratings of 95% or greater; oil furnaces, 90%. A boiler must have an AFUE of 90%.
Heating by burning a fuel is inherently inefficient. Simply put, high-efficiency furnaces have components that are better designed to get more heat out of the combustion process, Lunsford says. You’ll need to hire an HVAC contractor to calculate the size of the equipment needed for your home. Beware bidders who take a one-size-furnace-fits-all approach. Air source heat pumps and advanced main circulating fans can also qualify for the $1,500 tax credit.
Technically, a homeowner could replace either a furnace or a central air-conditioning unit and be eligible for the tax credit. Practically speaking, you probably will have to replace both for the A/C to qualify, says Enesta Jones, a spokeswoman for the U.S. Environmental Protection Agency. Most homes have split systems made up of an outdoor condenser and compressor that are connected to an indoor air handler that’s part of the furnace. Split systems must have a SEER rating of at least 16 and an EER rating of at least 13. The higher the rating, the more energy efficient the unit. A package A/C system, which houses all of its components outdoors, requires lower ratings.
HVAC’s value goes beyond savings
It typically takes about a decade’s worth of energy savings to recoup the investment in a new HVAC system, Lunsford says, though that time frame can vary greatly depending on how much fuel prices fluctuate. Less apparent in dollar terms are increasing the comfort level in your home and lowering your household’s drain on non-renewable fossil fuels. Then there’s the effect on your home’s value when it comes time to sell.
You’re going to enhance a home’s salability by moving to a more energy-efficient heating and cooling system, says Frank Lesh, president of Home Sweet Home Inspection Co. in Indian Head Park, Ill. That doesn’t mean adding a $5,000 furnace will add $5,000 to the sale price. Rather, potential buyers are less likely to push for repairs or negotiate a credit if the HVAC is in good shape. Evaluate systems older than 10 years for possible replacement.
But before you do, conduct a wider energy audit of your home. Lunsford, also manager of consumer education for the U.S. Green Building Council’s Chicago Chapter, says he rarely recommends replacing a furnace as the first step in making a home more energy efficient. Instead, start by sealing it against air leaks. Do-it-yourself caulking and weather-stripping help, as does adding insulation in the attic. Professional air sealing, which is more effective, can cost as much as $5,000 for a large house, he says. The payoff: Energy costs should go down, and you might be able to get by with a smaller HVAC system.
Getting tax credit for your upgrades
The federal energy tax credit is based on 30% of the cost of an eligible HVAC system. Installation charges count too. A $5,000 bill would max out the credit. You’ll need to owe more in taxes than you’re trying to claim in credits to qualify. Use IRS Form 5695. Save receipts for your records, as well as manufacturers’ certification statements. If part of a new HVAC system qualifies for the credit but another part doesn’t, ask the contractor to itemize the receipt.
The tax credit is aggregated for all qualifying energy upgrades—insulation, roofs, windows, and so on—so you can’t claim separate $1,500 credits for each project. Only improvements to your existing primary residence count. New homes and second homes are excluded.
Tax Credits for Adding or Replacing Insulation
• Your home's R-value is below recommended levels.
• You install qualifying insulation in 2009 or 2010.
• You haven't already maxed out the energy tax credit on other upgrades.
If putting a dent in your home’s heating and cooling bills is a priority, then adding insulation needs to be at the top of your to-do list. It’s a relatively affordable home-improvement project, and the savings can be felt almost immediately. Some DIYers can even tackle the project themselves over a weekend.
For a 2,200 square foot home, adding insulation to an attic can cost from $1,000 to $2,500 including labor, depending on how much you put in and how easy it is to install. Effort and expense go up when you add insulation to exterior walls or around hard-to-reach ductwork. A federal energy tax credit worth up to $1,500 can help defray the cost.
It all comes down to R-value
Insulation is measured in R-value, the resistance to heat flow. The higher the number the better the insulating power. The U.S. Department of Energy recommends R-values between 30 and 60 for most attics. Take a peek in yours. If your insulation is level with or below the attic floor joists, then you probably need more.
There are different types of insulation, including fiberglass, cellulose, mineral wool, spray foam, foam board, and cotton batting. The most familiar is pink fiberglass roll insulation. If you’re not sure what’s best suited for your home, check with an insulation contractor. Just about all insulation qualifies for the energy tax credit (more below) as long as its primary purpose is to insulate—insulated siding, for example, doesn’t count—and it brings your home up to recommended R-value guidelines.
Energy Star, a joint program of the DOE and U.S. Environmental Protection Agency, suggests R-38 insulation for most attics (or about 12-15 inches, depending on the insulation type). In colder climates, R-49 may be required. The DOE’s online calculator can recommend R-values for all areas of your home’s “envelope”: attic, walls, floors, basement, and crawl spaces.
Generally, most homes built before 1980 have inadequate insulation. The easiest insulation to add is blown loose-fill insulation. You’ll probably need to hire a contractor. Since insulating an attic isn’t too complicated, you can get quotes—at least three—by phone. However, get a copy of the quote in writing before work starts, and be sure it specifies R-value. Michael Kwart, executive director of the Insulation Contractors Association of America, recommends rolled insulation for do-it-yourselfers. New insulation can be added on top of existing insulation.
Savings and sustainability can add up
Depending on where you live and how much insulation you already have, adding more can trim heating and cooling costs anywhere from 10% to 50%. A homeowner in the Northeast with an uninsulated attic, for instance, can save about $600 a year by adding about 15 inches of insulation (R-38) between the rafters, according to the Energy Department. Just 6 inches can net annual savings of about $200.
The $1,500 federal tax credit can be applied toward 30% of the cost of insulation installed in your primary residence during 2009 and 2010. Let’s say you spend $1,760 on enough R-38 roll fiberglass to insulate the attic of your 2,200 square foot home. That’s $40 per 50 square feet retail, a fair estimate. You’ll be able to subtract $528 (30% of $1,760) straight off the top of your tax bill, as long as you paid more in federal taxes than you’re claiming in credits. Since a typical homeowner won’t be able to use up the entire tax credit on insulation alone, the remainder can be applied to other qualifying energy-efficiency upgrades like new windows or roofing. Just keep in mind that the total credit claimed for all of these improvements can’t exceed $1,500 for the two-year period.
Save receipts, and if a contractor did the work, get a receipt that’s itemized. Labor costs, typically 25% of the total bill, according to Kwart, don’t count toward the tax credit. There’s no need to file receipts when you claim the credit on Form 5695, but the IRS could ask you to cough one up later. Also hold on to product stickers from packaging that show R-values and manufacturers’ certification statements that attest to tax-credit worthiness. Check manufacturers’ websites for a copy of the statement. If you’re building a new home, you’re out of luck; only existing homes qualify for this tax credit, which can’t be carried over into future years.
Adding insulation is just the beginning
In conjunction with adding new insulation, conduct a whole-house energy audit to find other ways to reduce power consumption and save even more on monthly bills. Caulk around drafty windows and doors, and stop gaps in siding and the foundation, says Matt Golden, president and founder of San Francisco-based Sustainable Spaces. Reducing a home’s air leakage by 25% can lower annual energy costs by about $300, according to the Lawrence Berkeley National Laboratory.
Tax Credits for Non-Solar Water Heaters
• Your water heater is more than 10 years old.
• You install a qualifying replacement in 2009 or 2010.
• You haven’t maxed out the energy tax credit on other upgrades.
After heating and cooling costs, the largest energy expense for most homeowners comes from warming up water for doing dishes, washing laundry, and taking showers. According to Energy Star, a federal program that promotes energy-efficient products and practices, the average household spends between $400 and $600 annually on water heating.
You can take a bite out of those costs by upgrading to an energy-efficient gas tankless water heater. A typical home can reduce water-heating expenditures by about $115 a year with this type of system. A gas tankless water heater installed in your existing primary residence in 2009 or 2010 qualifies for a $1,500 federal tax credit. The credit for these heaters is based on 30% of the total cost.
The cost of going tankless
Expect to spend between $1,500 and $2,500, including installation, for a tankless water heater that runs on either natural gas or propane. The cost could go higher if you don’t already have a gas line running to your old heater. Even if you do, you may need to have the line and gas meter upgraded, and possibly enhance your venting, says Mark Petrarca, spokesman for water heater manufacturer AO Smith in Milwaukee.
The IRS excludes installation costs on some other energy improvements eligible for the $1,500 tax credit, but for water heaters installation counts. Save receipts and a certification statement from the manufacturer. You’ll need to file IRS Form 5695. Consult a tax advisor.
Tankless systems save energy by super-heating water on demand. Conventional storage tank water heaters warm water whether you’re using it or not. Tankless water heaters that qualify for the tax credit must have an energy factor of at least 0.82 or a thermal efficiency of at least 90%, according to Energy Star. These ratings are marked on the unit. Energy Star offers a list of qualified gas tankless water heaters. Electric tankless water heaters aren’t eligible for the tax credit.
Another plus, tankless systems are much smaller than traditional storage tank water heaters. They take up about half the space and can be mounted on a wall. They last longer too. On average, you get 10 years out of a traditional water heater; tankless systems last up to 20 years. There’s also less chance of rusting and leaking with tankless heaters.
Other types of water heaters
There are other types of water heaters than gas tankless systems, but most are either impractical for the average home, not yet widely available, or ineligible for this federal tax credit. In addition to electric tankless water heaters, electric storage tank water heaters don’t qualify for the federal tax credit. The energy savings from these electric systems is minimal. The only gas storage tank water heaters that meet the energy-efficiency requirements of the tax credit are too large for standard residential use. Solar water heaters are eligible for a separate federal tax credit, not the $1,500 one.
If you can wait, two new water-heating technologies eligible for the $1,500 tax credit should become more widely available in 2010. Gas condensing water heaters are similar to gas storage tank heaters, but they make more efficient use of gas. Annual savings is similar to a gas tankless system. More intriguing are electric heat pump water heaters that use pressure to heat a liquid refrigerant that in turn heats water in a storage tank. Heat pump water heaters will likely cost a bit less than tankless systems, and the average annual energy savings is much higher: $290 vs. the $115 you get from going tankless.
Marci Sanders, senior manager at D&R International, which works with the Energy Star program, estimates the payback period for upgrading to a gas tankless system is between eight and 10 years. With the new electric heat pump heaters, the payback period is about three years. If you have a perfectly good storage tank water heater purchased within the last decade, you can likely save from $20 to $50 on annual energy costs simply by covering your existing hot water heater with an insulating blanket and turning down the heater’s thermostat.
Don’t wait until it’s too late
If your current water heater is starting to show wear and tear, like rust or small leaks, it’s time to look for a new one. Most homeowners end up replacing a water heater only after it stops working. Bad idea. When a water heater fails, there’s the potential for a big, wet mess. There’s also the inconvenience of living without hot water. Worse, panicked homeowners tend to rush into a purchase without shopping around or weighing the benefits of newer technologies.
When you’re looking to upgrade, first make sure the unit qualifies for the federal tax credit. Next, you want to figure out how big of a unit to get. Tankless models are rated by how many gallons of hot water they produce per minute. How much hot water you use at one time will determine what makes sense for your home. Do you take long showers while running the dishwasher and washing machine? Consult a plumber, but figure 3 gallons per minute should be sufficient for most families.
Tax Credits for Replacing Windows, Doors, and Skylights
• Your windows are drafty or more than 15 years old.
• You install qualifying replacements in 2009 or 2010.
• You haven't already maxed out the energy tax credit on other upgrades.
Does it feel like money is escaping through your home’s drafty windows, doors, and skylights? You might be able to keep at least some of that cash in your pocket by taking advantage of federal energy tax credits for retrofitting your house with qualified energy-efficient replacements. You can claim a tax credit of up to $1,500 for upgrading the windows, exterior doors, and skylights in your primary residence during 2009 and 2010.
The credit is based on 30% of the cost of materials, so a $5,000 purchase would max it out. But a tax credit alone isn’t reason enough to start calling contractors. Do a little homework first. The true value of replacing aging windows, doors, and skylights isn’t always an open-and-shut case.
Follow the 15-year rule for windows
A good rule of thumb for window replacement: Don’t bother if they’re less than 15 years old, says Jim Rooney, a home inspector in Annapolis, Md. The savings on your energy bills likely will be negligible since window technology hasn’t changed that radically and the integrity of your windows should still be intact. Shoddy installation or poor manufacturing may call for exceptions to the 15-year rule. Windows that are 20, 30, or more years old are prime candidates for replacement.
Most of your focus should be on windows, since they’re more numerous, but skylights are notorious for energy loss too, not to mention water leaks. Exterior doors tend to outlast windows, so keep them unless the upgrade is purely for aesthetic reasons. Besides, weather stripping and snug sweeps can boost the energy efficiency of exterior doors for a whole lot less money.
Adding up the costs—and savings
With windows, doors, and skylights, you get what you pay for. Expect to shell out between $500 and $1,000 per window including installation, or about $10,000 total for a moderately sized house of about 2,000 square feet. New energy-credit-qualified doors and skylights are also in the $500 to $1,000 range, including installation.
Tom Herron, of the National Fenestration Rating Council, says products on the higher end of the cost scale are usually better constructed and more energy efficient. NFRC is a non-profit organization that administers the rating and labeling system for the energy performance of windows, doors, and skylights.
It could take years to recoup the upfront costs, but you should see an immediate reduction in your energy bills. In general, you’ll save $126 to $465 a year if single-pane windows in a 2,000 square foot house are replaced with tax-credit-eligible windows, according to the Efficient Windows Collaborative, a trade group. That’s 15% to 40% off the typical energy bill.
Do my replacements qualify?
A label alone doesn’t guarantee your new windows, doors, and skylights qualify for the energy tax credit, but it does provide critical information related to eligibility. To qualify, windows, doors, and skylights must have a U-factor of 0.30 or less and a Solar Heat Gain Coefficient (SHGC) of 0.30 or less. The U-factor measures how well a product prevents heat from escaping, and the SHGC gauges how well a product blocks heat from the sun. Labels also carry information on light transmission, air leakage, and condensation resistance.
Herron, of the NFRC, says about 80% to 85% of the manufacturers in North America provide NFRC labels. All Energy Star qualified windows carry an NFRC label, according to Energy Star, a joint program of the U.S. Department of Energy and the U.S. Environmental Protection Agency that promotes energy-efficient products and practices.
Resist the urge to trim costs by purchasing cheaper windows, doors, and skylights with poor U-factor and SHGC ratings. Not only will you miss out on the tax credit, energy bills won’t come down much.
Taking advantage of the tax credit
A credit is especially valuable because it directly reduces the amount of tax owed, as opposed to a deduction, which lowers the amount of taxable income. To be eligible for the full credit you must owe more in federal taxes than you’re trying to claim. Use IRS Form 5695 to take advantage of the credit, which is cumulative for 2009 and 2010 only. You can’t claim $1,500 for each tax year, but you can spread the $1,500 over the two-year period.
Uncle Sam may want proof that your new windows, doors, and skylights meet energy-efficiency standards, so be sure to save receipts, product stickers, and certification statements. The latter can often be found on packaging or manufacturers’ web sites. As for receipts, ask contractors to itemize expenses. Installation costs aren’t eligible for the credit; only materials are.
Keep in mind that a variety of energy-efficiency improvements to your existing home, including insulation, roofs, and HVAC, count toward the credit limit. You can’t claim separate $1,500 credits for each upgrade, nor can you claim the credit for a newly built home. Matt Golden, president and founder of San Francisco-based Sustainable Spaces, says homeowners can often lower energy costs for a lot less, and still get the tax credit, by insulating attics instead.