The Internal Revenue Code includes two different tax credits for energy-saving home improvements. The rules for one of the credits have changed significantly for the worse since 2010, and that credit is scheduled to expire on 12/31/11. The other credit, which covers more exotic and expensive improvements, is still generous. Here's what you and your clients need to know for them to cash in on the credits this year.

Modest $500 Credit for Basic Energy-saving Improvements

The first credit, under IRC Sec. 25C , equals 10% of certain qualified expenditures plus 100% of certain other qualified expenditures, subject to a maximum overall credit of $500. That's pretty skimpy, and the $500 maximum must be reduced by any Section 25C credit claimed in any earlier post-2005 year. This restriction will cause many clients to be completely ineligible for 2011. For instance, say your client claimed a $1,500 Section 25C credit in 2010 (when the rules were much more generous) for installing energy-efficient windows. That client cannot claim any Section 25C credit in 2011. Sorry about that!

The good news is the credit (when allowed) covers a broad range of energy-saving expenditures for a taxpayer's principal U.S. residence (including a manufactured home). Plus, it's available against Alternative Minimum Tax (AMT), and there are no income restrictions. However, expenditures for vacation homes and foreign residences are ineligible.

Here are some more details on the Section 25C credit.

Eligible Improvement Costs. For the following improvements to a U.S. principal residence, the maximum credit equals 10% of qualified 2011 expenditures up to the overall $500 credit cap, reduced by any Section 25C credit claimed in any earlier post-2005 year.

·        Exterior windows, including skylights, that meet or exceed Energy Star program requirements—subject to a separate $200 credit cap for all post-2005 years. For instance, if your client claimed a $200 or more credit for new windows installed in 2010, no credit can be claimed for windows installed in 2011.

·        Exterior doors that meet or exceed Energy Star program requirements.

·        Insulation material or systems designed to reduce heat loss or gain that meet criteria established by the 2009 IECC.

·        Metal and asphalt roofs that meet or exceed Energy Star program requirements and have pigmented coatings or cooling granules designed to reduce heat gain of the residence.

Eligible Equipment Costs. For the following items of energy-saving equipment installed in a U.S. principal residence, the maximum credit equals 100% of qualified 2011 expenditures up to the overall $500 credit cap, reduced by any Section 25C credit claimed in any earlier post-2005 year.

·        High-efficiency central air conditioners; electric heat pumps; electric heat pump water heaters; water heaters that run on natural gas, propane, or oil; and biomass fuel stoves used for heating or hot water—subject to a separate $300 credit cap for 2011 for these items.

·        Furnaces and hot water boilers that run on natural gas, propane, or oil—subject to a separate $150 credit cap for 2011 for these items.

·        Advanced main air circulating fans used in natural gas, propane, and oil furnaces—subject to a separate $50 credit cap for 2011.

Basis Adjustments. The taxpayer's basis in the residence is increased by qualified expenditures and reduced by the amount of any allowable Section 25C credit.

Generous 30% Credit for Big Ticket Energy-saving Equipment

The second credit, under IRC Sec. 25D , equals 30% of qualified expenditures to buy and install more-exotic (and more-expensive) energy-saving equipment for a U.S. residence (manufactured homes are apparently eligible).

Qualified Expenditures. In general, 30% of the cost for the following types of equipment (including costs for site preparation, assembly, installation, piping, and wiring) count as eligible expenditures for the Section 25D credit.

·        Qualified solar water heating equipment for a U.S. residence, including a vacation home.

·        Qualified solar electricity generating equipment for a U.S. residence, including a vacation home.

·        Qualified wind energy equipment for a U.S. residence, including a vacation home.

·        Qualified geothermal heat pump equipment for a U.S. residence, including a vacation home.

·        Qualified fuel cell electricity generating equipment for a U.S. principal residence . Vacation homes are ineligible for the fuel cell credit. Also, the maximum annual fuel cell credit is limited to $500 for each .5 kilowatt hour of fuel cell capacity added during that year.

Big Expenditures Translate into Big Credits. Because expenditures for the aforementioned items can be big numbers, Section 25D credit amounts can be big too. And there are no income limits—even billionaires are eligible. Plus, it's available against AMT. If the client's 2011 Section 25D credit is so large that it cannot be fully utilized on this year's return, the excess can be carried forward to 2012 and beyond.

No Hurry for This Credit. The Section 25D credit is available through 2016, so there is no need to rush to take advantage.

Basis Adjustments. The taxpayer's basis in the residence is increased by qualified expenditures and reduced by the amount of any allowable Section 25D credit.

Manufacturers' Certifications Are Required for Both Credits

A good place to start your search for an energy efficient product is at www.energystar.gov/taxcredits , where you'll find requirements for various products. But, to be sure that the product purchased satisfies the required energy saving conditions for the credit, the client must obtain the manufacturer's certification that the product in question qualifies. The certification may be on the product packaging or it may be available on the manufacturer's website. In any case, the certification should be kept with the client's tax record. Certifications need not be attached to the client's tax return, but the return must include a completed Form 5695 (Residential Energy Credits).

Conclusions

The modest Section 25C credit is scheduled to expire at year-end. So, time may be of the essence to take advantage. There is no big hurry to cash in on the much-more-generous Section 25D credit. It will be available through 2016.

In addition to the two tax credits explained here, clients might also be eligible for state and local income tax benefits, subsidized state and local financing deals, and utility company rebates. These extra inducements can amount to hundreds of dollars or more. They can usually be found by conducting an Internet search. However, note that expenditures made from subsidized energy financing don't qualify for the Section 25C credit (the $500 credit).

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