Tax Credit – ON EFFICIENCY FURNACES


EXPLAINING THE $1,500 TAX CREDIT

AND HOW INSTALLING A 95% EFFICIENCY FURNACE THIS YEAR CAN

EARN YOU TAX SAVINGS

Key concepts/terms

taxable income

tax deduction

income taxes

tax credit

tax bracket

  • Taxable income is what creates income taxes.
  • A tax deduction is a dollar for dollar reduction of taxable income.
  • Taxable income creates income taxes owed according to your tax bracket.
  • A tax credit is a dollar for dollar reduction of income taxes owed as a result of taxable income.
  • A tax credit is more valuable than a tax deduction because it reduces the taxes owed on taxable income dollar for dollar.
  • The real economic value of the $1,500 energy tax credit depends on the individual’s tax bracket.

Federal Income Tax Brackets For 2010 – Based On Taxable Incomenot gross income—Ranges

Tax Rate Married Couples Filing Jointly Most Single Filers
10% Not over $16,750 Not over $8,375
15% $16,750 – $68,000 $8,375 – $34,000
25% $68,000 – $137,300 $34,000 – $82,400
28% $137,300 – $209,250 $82,400 – $171,850
33% $209,250 – $373,650 $171,850 – $373,650
35% Over $373,650 Over $373,650

Examples of calculating the real economic benefit of the credit to a qualified taxpayer.

Assume a home owner is in the 25% tax bracket.  This means that for every taxable dollar of income, the homeowner creates $00.25 of income tax liability.  It is a simple 4:1 ratio.  Therefore, a $1,500 tax credit is the same as if the owner was able to take a one time deduction off of their taxable income of $6,000.  $6,000 x 25% = $1,500 tax savings.  So the tax credit is worth much more than just $1,500.

Another way of looking at it in terms of a tax deduction, putting in a new 95% efficient furnace (for someone in the 25% tax bracket) is the same as the owner being able to “write off” or expense $6,000 off of their taxable income.

The new energy efficient furnace really does not really cost the homeowner in a 25% bracket anything.  The first $6,000 cost of a new 95% furnace is “free” in the sense that the value of the tax credit to someone in the 25% bracket offsets the out of pocket cost (up to $6,000).

IT’S EVEN MORE FINANCIALLY ADVANTAGEOUS TO CUSTOMERS IN LOWER TAX BRACKETS

This economic benefit to a homeowner in a lower tax bracket is even greater.  Assume a homeowner is in the 15% bracket.  This means for every $1 of taxable income $00.15 of tax liability is created.  The net effect of a $1,500 tax credit to someone in the 15% bracket is the same as being able to deduct $10,000 off of their taxable income because to create $1,500 of tax liability, that person has to have $10,000 of taxable income.  The owner can, in essence, pay up to $10,000 for a new furnace and tankless water heater and still break-even.

To someone in a 10% tax bracket, the equivalent taxable income reduction is equivalent to being able to deduct $15,000 off of the taxable income ($15,000 taxable income x 10% bracket = $1,500 of taxes owed).

Lower efficiency furnaces that cost less and don’t qualify for the tax credit “cost” more than installing a 95% efficiency furnace.

THERE ARE LIMITATIONS TO THE TAX CREDIT AND YOU SHOULD CONSULT YOUR OWN TAX ADVISOR OR VISIT THE IRS’ WEBSITE FOR MORE DETAILS.

FAQ’s from IRS website www.irs.gov

Energy Incentives for Individuals: Questions and Answers

Q. How has the American Recovery and Reinvestment Act of 2009 affected the tax credits for energy efficient home improvements?

A. The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes.  The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as “energy efficient” for purposes of this tax credit. The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards. See Notice 2009-53.

Q. What improvements qualify for the enhanced residential energy property credit for homeowners?

A. In 2009 and 2010, an individual may claim a credit for 30 percent of the cost (subject to the overall credit limit of $1,500) for the installation of the following qualifying products:

  • Energy-efficient exterior windows, doors and skylights
  • Energy-efficient heating and air conditioning systems
  • Insulation
  • Water heaters (natural gas, propane or oil)
  • Roofs (metal and asphalt)
  • Biomass stoves

Q. Who qualifies to claim a residential energy property credit? Are there limitations?

A. You may be able to take these credits if you made energy saving improvements to your personal residence. This credit is limited to improvements placed in service during 2009 and 2010 up to a total credit of $1,500 for both tax years combined.

The residential energy property credit is non refundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.

Q. Are there incentives for making your home energy efficient by installing alternative energy equipment — for example, installing a solar hot water heater?

A. Yes, the residential energy efficiency property credit has been enhanced to remove some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property. Qualifying property includes solar water heaters, geothermal heat pumps and small wind turbines, installed in a home.  For more information, see Notice 2009-41, which explains the effects of this change.

To get the IRS form and instructions:

http://www.irs.gov/pub/irs-pdf/f5695.pdf

Written by Steve Araki, PC

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