ENERGIZE YOUR TAX RETURN – WITH RESIDENTIAL & NON-BUSINESS ENERGY TAX CREDITS
While politicians say that they are energy conscious, the tax credits associated with home improvements comes and goes, the rules change, and the credit is not the easiest to compute because of dollar limitations, percentages of property eligible for the credit, and prior years’ adjustments.
Working with an experienced tax professional for tax preparation and tax planning can often result in reducing one’s tax bills as the tax professional is reading and keeping abreast of IRS announcements. In Notice 2013-70 the IRS provided guidance for claiming tax credits for non-business energy property (IRC Sec. 25C) and residential efficient property (IRC Sec. 25D) for the 2013 tax year.
While the content of this notice is far too broad to cover in this post, we have commented on just a few points of interest. Any person who has installed energy efficient property in 2013 or plans to do so should read this IRS notice which can be found on the IRSs’ website, www.irs.gov and then speak with their tax professional for guidance.
Since not all improvements will qualify for the energy credit, an unscrupulous contractor may mention to the homeowner that the IRS allows energy credits hoping that the homeowner will think that a tax credit is available for the work being done. Unfortunately, not all energy home improvement projects qualify for the IRS tax credit.
How can the homeowner protect themselves to ensure that they are entitled to the tax credit? The IRS states that taxpayers can usually rely upon the manufacturer’s certification that the property is eligible for the tax credit. Thus, it behooves all taxpayer’s who are making energy efficient improvements to insist upon obtaining the manufacturer’s certification as part of the contract agreement when having the work done. By obtaining the manufacturer’s certification, the taxpayer has the proper substantiation to prove that the improvement qualifies for the credit.
The credits are available when the property is installed and paid for and the taxpayer is using the property (is living in the residence). The dollar amount of the credit will be determined by the type of property installed. The IRS’s overall limitations of the amount of the credit that can be claimed may have to be reduced by prior years’ energy credits claimed.
These tax credits are non-refundable. That means that the taxpayer can only receive a tax benefit by using it to decrease or eliminate a tax liability. A taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year.
There are differences in the treatment of §25C and §25D credits, including . . .
- The §25C credit can only be claimed for qualifying expenditures incurred for a existing home or for an addition or renovation to an existing home, and not for a newly-constructed home.
- In contrast, the §25D applies to qualifying expenditures for an existing or newly constructed home.
- §25D applies to a principal residence, not a vacation or investment property.
- While taxpayers may not carryforward an unused Sec. §25C to another tax year, the §25D credit may be carried forward to the subsequent tax year.
- The §25C credit expires at the end of 2013; the §25D credit expires at the end of 2016.
To receive an energy tax credit, only certain energy expenditures qualify for the credit. To determine what meets the IRS test of “qualified energy efficiency improvements” and “residential energy property expenditures”, this Notice instructs taxpayers to rely on the definitions in §25C(c) and (d) of the Internal Revenue Code.
Note: If you want to learn more about whether your home improvements qualify for the energy tax credit, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
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