Friday, November 19, 2010

Tax Credits for Replacing Heating and Cooling Systems

Upgrading to an energy-efficient heating and cooling system can save hundreds on your utility bills and earn you a tax credit worth as much as $1,500.
Replacing an aging heating and cooling system can save you money over time. According to Energy Star, a federal program that promotes energy efficiency, about half of what the average household spends on energy bills goes 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. A tax credit for heating and cooling systems can make the project more affordable.

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 adviser.

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 Storm Windows and Storm Doors

Storm windows and storm doors are eligible for tax credits, and offer an economical alternative to replacement windows and doors for your home.
Storm windows and storm doors are much cheaper to add to your home than full replacement windows and doors. Compounding the appeal, installation is easier and energy savings are comparable.

The federal tax credit for energy-efficient windows and doors applies to storm windows and storm doors too. As long as the windows and doors meet efficiency standards, homeowners can earn a tax credit worth 30% of the cost of materials. The credit maxes out at $1,500.

Storm windows are a fraction of the cost
Storm windows make the most sense if your home has single-pane windows. They’re designed to fit in existing openings, on either the inside or outside, and newer models open and close. It’s an immediate and inexpensive way to eliminate drafts and cut energy costs. The insulation gain from storm windows is nearly identical to most energy-efficient, double-pane windows, says Chris Dorsi, author of “The Homeowner’s Handbook to Energy Efficiency.”

While you would pay between $500 and $1,000, including installation, per tax credit-eligible replacement window, a storm window only runs about $100 to $300 installed. Contractors can outfit a typical house with storm windows in a day or two, vs. two to three days for replacement windows.

Storm doors, which limit energy loss from leaks around existing exterior doors, cost about $200 to $300 apiece. Another big benefit of a storm door, assuming it’s equipped with a retractable or interchangeable screen, is allowing air flow between the inside and outside when the weather is nice. However, because storm doors make up such a small percentage of a home’s total exterior compared to windows, the energy savings are minimal.

Qualifying for the energy tax credit
You can claim a federal energy tax credit of up to $1,500 for adding storm windows and storm doors in your primary residence during 2009 and 2010. File IRS Form 5695. The credit is based on 30% of the cost of materials only. Ask your contractor to itemize the bill. Typically, two-thirds of what you pay goes toward materials, one-third toward labor.

Storm windows and storm doors must meet energy-efficiency standards to earn the tax credit. Look for efficiency ratings on product labels. However, that’s just the start.

According to Energy Star, to qualify a window or door opening retrofitted with a storm window or door must have a total U-factor of 0.30 or less and a Solar Heat Gain Coefficient of 0.30 or less. U-factor measures how well a window or door keeps heat in; SHGC tells you how well heat from sunlight is kept out. In both cases, the lower the number, the better.

The problem lies in the fact that the standards are for the entire opening. In other words, a calculation needs to be made as to whether, say, a storm window combined with an existing window meets the U-factor and SHGC thresholds.

Karen Schneider, an Energy Star spokeswoman, says to be safe homeowners should ask a window retailer or contractor to determine the insulation value of the opening once a storm window is installed. The IRS doesn’t require homeowners to provide proof of insulation value with a tax return, but get it in writing if you can. It’s also smart to save receipts and the manufacturer’s certification statement for the product.

Homes in colder climates benefit more
You get more bang for your buck with storm windows if you live in a colder climate. Keeping heat in and drafts out adds up in energy savings. In warm climates, storm windows’ benefits are more limited unless they’re made of reflective glass that deflects the sun’s rays, says Adam Winter, co-founder of Recurve, a San Francisco company that does home energy audits and green remodeling.

Like replacement windows, storm windows can save you about 15% to 40% on energy bills, or from $126 to $465 a year. That’s assuming a 2,000-square-foot home with single-pane windows, according to the Efficient Windows Collaborative. Those living in colder climates should see savings closer to the top end of the range. Since storm windows are cheaper than replacement windows but the energy savings are similar, the payback period for storm windows should be a lot shorter.

When weighing storm windows vs. replacement windows, Mark Meshulam, author of the Chicago Window Expert blog, says homeowners should note that storm windows may not provide as much of a return at resale. They aren’t as attractive as full replacement windows, they’re less convenient since you need to open two windows to get fresh air, and they’re more prone to moisture problems. According to Remodeling Magazine’s 2009-10 Cost vs. Value Report, replacement windows recoup about three-fourths of their cost at resale. The magazine doesn’t track storm windows.

Tax Tips for Homeowners Looking Ahead to 2010 Returns

From energy tax credits to vacation home deductions, check out these tax tips for homeowners looking ahead to 2010 returns.
Tax planning for homeowners should start well in advance of the April 15 filing deadline each year. If you delay until the last minute, it might be too late to maximize tax credits and tax deductions. These tax tips for homeowners looking ahead to 2010 returns explain some of the things you can do now that’ll pay off later on your 1040.

Take a day to formulate a tax plan for the year. Depending on your circumstances, you might want to take advantage of energy tax credits or max out your vacation home deductions. The “What’s New in 2010” section of IRS Publication 17 offers a sneak peek at tax changes that might affect homeowners.

Claim remaining energy tax credits
It’s time to get cracking if you didn’t exhaust your full allotment of residential energy tax credits during 2009. Although tax credits for big projects like residential wind turbines and solar energy systems have no upper limit and are good through 2016, energy tax credits capped at $1,500 expire at the end of 2010. Eligible capped projects include new windows and doors, insulation, roofing, water heaters, HVAC, and biomass stoves.

Here’s how it works with capped federal credits: You can earn energy tax credits worth 30% of the cost of qualifying improvements, but the total tax credits can’t exceed $1,500 combined for 2009 and 2010. So if you only took, say, $700 worth of capped energy credits on your 2009 tax return, you’re still due for another $800 in credits in 2010. Some projects include the cost of installation—a furnace, for example—while others, such as insulation, are limited to the cost of materials.

Max out tax benefits of a vacation home
Use a vacation home wisely, and it’ll provide a break from taxes as well as the hustle and bustle of everyday life. The rules on tax deductions for vacation homes can get a bit tricky, but understanding and adhering to them can yield many happy tax returns.

If your vacation home is truly a vacation home meant for your personal enjoyment, as opposed to a rental-only income property, you can usually deduct mortgage interest and real estate taxes, just as you would on your main home. You can even rent out the home for up to 14 days during the year without getting taxed on the rental income. Not bad.

Now, let’s say you want to rent out your vacation home for more than 14 days in 2010, but also use it yourself from time to time. To maximize the tax benefits, you need to keep tabs on how many days you use your vacation home. By restricting your annual personal use to fewer than 15 days (or 10% of total rental days, whichever is greater), you can treat your vacation home as a rental-only income property for tax purposes.

Why is that a big deal? In addition to mortgage interest and real estate taxes, rental-only income properties are eligible for a slew of other tax deductions for everything from utilities and condo fees to housecleaning and repairs. Deductions are limited once personal use exceeds 14 days (or 10% of total rental days), so get out your calendar now to strategically plot your vacations.

Take advantage of tax breaks for the military
In salute to members of the armed forces serving overseas who want to purchase a home, the IRS is extending a lucrative tax perk for military personnel. If you spent at least 90 days abroad performing qualified duty between Jan. 1, 2009, and April 30, 2010, you have an extra year to earn a homebuyer tax credit. In addition to uniformed service members, workers in the Foreign Service and in the intelligence community are eligible.

Thanks to this extension of the homebuyer tax credit, qualifying military personnel have until April 30, 2011, to sign a contract on a new home. The deal must close before July 1, 2011. Just like non-military buyers, first-time homebuyers can earn a tax credit worth up to $8,000, and longtime homeowners can earn a credit of up to $6,500. The same income restrictions and $800,000 cap on home prices apply.

Military personnel can also get a break if official duty calls and they’re forced to move for an extended period. Normally, the homebuyer tax credit needs to be repaid if you sell your home within three years, but this requirement is waived for uniformed service members, Foreign Service workers, and intelligence community personnel. The new extended duty posting doesn’t need to be overseas, but it must be at least 50 miles from your principal residence.

Challenge your real estate assessment
You can’t do much about the rate at which your home is taxed, but you can try to do something about how your home is valued for taxation purposes in 2010. The process varies depending where you live, but in general local governments conduct a periodic real estate assessment to determine how much your home is worth. That real estate assessment figure is used to calculate your property tax bill.

You can usually appeal your real estate assessment if you think it’s too high. Contact your local assessor’s office to find out the procedure, and be prepared to do some research. There’s often no charge to request a review of your assessment.

Look for errors. You probably received an assessment letter in the mail, and many local governments provide the information online as well. Make sure the number of bedrooms and bathrooms is accurate, and the lot size is correct. Also check the assessed value of comparable homes in your area. If they’re being assessed for less than your home, you might have a case for relief.

Even if your assessment is accurate and comparable homes are being taxed at the same rate, there might be another route to tax savings. Ask your assessor’s office about available property tax exemptions. Local governments often give breaks to seniors, veterans, and the disabled, among others.