Solar panels
Haraz Ghanbari  /  AP
Solar panels are seen on the roof of an Arlington, Va. house. Taxpayers can claim up to a $500 tax credit on energy-saving home improvements.
updated 2/16/2007 4:03:20 PM ET 2007-02-16T21:03:20

Did you install an energy-efficient water heater or furnace in 2006? How about a solar panel, storm door or insulation? You may reap a reward at tax time.

With fuel and other energy costs skyrocketing last year, consumers who purchased energy-efficient home improvements or hybrid vehicles can take a tax credit — one of the tax code’s biggest prizes.

Credits amount to pure gold for the taxpayer because they are a dollar-for-dollar reduction in tax liability, whereas a tax deduction only reduces the income against which tax is assessed.

Many home improvements can qualify for the residential energy credit, including insulation, certain water heaters, air conditioners, fans, furnaces, skylights, exterior windows and doors, solar panels and metal roofs with pigmented coatings designed to reduce a home’s heat gain.

The credit is usually 10 percent of the cost, though there may be separate limits for specific devices. For example, up to $50 can be claimed for a main circulating air fan and up to $150 for a natural gas, propane or oil furnace, or hot water boiler. No more than $200 of the credit can be for windows.

The credit is limited to $500 for the 2006 and 2007 tax years combined. So if you claim the entire $500 credit for 2006, you won’t get the credit for 2007.

Separately, taxpayers can take a credit of 30 percent of the cost of a solar panel, solar water heater or fuel cell power plant to heat their homes, up to a maximum credit of $2,000. No part of such a system can be used to heat a pool or hot tub, however.

To be eligible for a residential energy credit, the device has to be “qualified energy property,” meaning it must meet criteria established by the 2000 International Energy Conservation Code and its supplements or, for windows and certain other items, bear the Energy Star label.

How do you know if your improvement meets the test? The Internal Revenue Service permits you to rely on the manufacturer’s claim.

“You really are going to have to rely on the promotional material you get from the manufacturer,” said Bob Scharin, senior tax analyst from Thomson Tax & Accounting, who edits a monthly journal for tax professionals. “The IRS guidance says you can rely on that. If the IRS later finds that there were inaccuracies, they can fine that manufacturer.”

“Save your documentation,” says Mark Steber, vice president of tax resources for Jackson Hewitt Tax Service, which has 6,000 tax preparation locations across the country. “Many companies who provide these types of property have placed certifications on their Web sites. Coupled with proof of purchase, you should be in good shape.”

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Donna LeValley, contributing editor of J.K. Lasser’s income tax guide, suggests taxpayers check the Energy Star Web site for information about energy-saving home improvements. Energy Star is a joint program of the U.S. Energy Department and Environmental Protection Agency. The Energy Star label indicates a device meets government energy efficiency guidelines.

Be warned, this credit isn’t intended to apply to household appliances like dishwashers or refrigerators, even if they bear the Energy Star label. It’s only for home improvements that reduce a home’s “heat loss or gain,” according to the law.

You don’t have to submit any of the supporting documentation with your tax return, but you must submit Form 5695 showing your credit calculation.

There’s another energy credit in the tax code for hybrid or alternative-fuel vehicles, though applying it is a bit trickier.

Taxpayers who bought a new hybrid gas-electric car or truck in 2006 are eligible for a credit that depends on the vehicle’s fuel economy, weight and technology.

Complicating the picture is the fact that the credit is reduced on a quarterly schedule after the quarter in which the manufacturer reaches sales of 60,000 of all its hybrids and alternative fuel vehicles.

For example, the popular Toyota Prius originally qualified for a top credit of $3,150. Last Oct. 1, after Toyota reached the 60,000 hybrid vehicle mark, the Prius credit fell to $1,575.

Taxpayers don’t have to worry about calculating the credit themselves or figuring out whether the manufacturer has reached the 60,000 mark.

Instead, go the IRS Web page for a list

of each qualifying vehicle and its available credit. Models marked with a small cross (+) have already had their credits reduced because the manufacturer has sold 60,000 qualifying vehicles. The IRS says it updates the Web site constantly, so the figures on the Web page should be accurate.

File Form 8910, “Alternative Motor Vehicle Credit,” when claiming this credit.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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