Tax Article - Highlights of the Energy Policy Act of 2005 for Individuals

During 2006, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns next year. The new law provides tax credits for making your principal residence (which must be in the U.S.) more energy efficient and for buying certain energy efficient items. The also law provides credits for certain alternative motor vehicles, such as hybrids.

Recent tax law changes issued by the IRS in the Energy Policy Tax Act of 2005 provide personal tax credits for making a principal residence more energy efficiency and for buying certain energy efficient items. Purchasing and installing energy-efficient appliances and products as well as buying and driving a fuel-efficient vehicle provide many benefits such as lower fuel costs, fewer emissions, lower energy bills, increased indoor comfort, and a reduction in air pollution.

Non-Business Energy Property

The law provides a 10% credit for buying qualified energy efficiency enhancements. In order to qualify, the component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and has to be installed in the taxpayer’s primary U.S. residence.

The following items qualify:

• Insulation systems that reduce heat loss or gain
• Exterior windows (including skylights)
• Exterior doors
• Metal roofs (meeting applicable Energy Star requirements)

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Residential Energy Property Expenses

The law also grants a credit for costs relating to residential energy property expenses. In order to qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury (also installed in the taxpayer’s primary U.S. residence). The maximum credit for all taxable years is $500 (no more than $200 of which can be approved for window expenses).

The following items qualify:

• $50 for each advanced main air circulating fan
• $150 for each qualified natural gas, propane, or oil furnace or hot water heater
• $300 for each item of qualified energy efficient property.

Solar Equipment

The new law makes a credit available to those who add approved solar panels, solar water heating equipment, or a fuel cell power plant to their primary U.S. residence. A qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity (only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity). Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub. Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity. These items must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008.

Alternative Motor Vehicles

The tax credit for hybrid vehicles may be as much as $3,400 for those who purchase the most fuel-efficient passenger automobiles and light trucks. Given that taxpayers may claim the full amount of the allowable credit only up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid and/or advanced lean-burn technology motor vehicle, consumers seeking the credit may want to buy early in the year. The phaseout period for a manufacturer begins with the second calendar quarter after the calendar quarter in which the manufacturer records its 60,000th sale. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. For quarters after that fifth quarter, taxpayers may not claim the credit. Tax credits are available for purchasing certain other vehicles such as fuel cell vehicles, alternative fuel vehicles and hybrid heavy trucks.

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