Understand federal energy tax credits

By now you’ve probably seen an ad on TV, in print, or online offering to help home owners secure energy tax credits in exchange for a fee. The Better Business Bureau has fielded numerous complaints about these home-improvement contractors. Alison Southwick, national spokeswoman for the BBB, reminds homeowners that there’s no charge to claim a legitimate credit when you file your federal income tax return.

Southwick adds that a contractor touting a “tax credit special” may or may not have the best price. Evaluate the offer as you would any other from a contractor. Whether an energy-efficiency improvement qualifies for a tax credit depends on the type of upgrade and the materials used, not who performs the work.

Use IRS Form 5695 to claim a residential energy tax credit. You can fill it out yourself, or have your tax preparer handle it along with the rest of your return. (H&R Block’s average tax-prep fee is $187.) Save receipts and manufacturers’ certification statements attesting to the tax credit-worthiness of the materials used.

Energy Star ratings are no guarantee

Your tax credit, not to mention your energy savings, will be in jeopardy if you blindly follow the advice of unscrupulous (or uninformed) contractors. Spend an hour online verifying that your energy-efficiency project qualifies for a credit. Not all Energy Star products do, for example. Be wary of someone who claims otherwise.

That’s why you need to find out about the materials being used. Get details in writing, and examine the packaging before installation. For instance, only certain metal and asphalt roofs are eligible for a tax credit. Meanwhile, new windows must meet very stringent efficiency guidelines.

Assurances about what types of homes qualify also call for careful scrutiny. You can only earn tax credits for furnaces and biomass stoves installed in an existing principal residence, for example. Yet wind turbines and geothermal heat pumps qualify when installed in second homes, even if those homes are new constructions.

Ask for your bill to be itemized since labor doesn’t always count toward a tax credit. Most installation charges are eligible, with the exception of windows, doors, roofing, and insulation. In those cases only the costs of materials apply.

Actual savings will vary

Be realistic about any promised savings, as well as the time it’ll take to recoup an investment. The average household spends about $2,200 annually on home energy bills, according to the Alliance to Save Energy. You, however, will spend more or less depending on regional climate, the condition of your home, energy sources, and other factors.

Lowering energy bills by, say, 25% means a lot more for a homeowner who pays $400 a month compared with someone who pays $100 a month. Over the course of a year that’s a savings of $1,200 vs. just $300. Same goes for payback. A modest project that “pays for itself” in a couple of years may offer a better return on investment than a more ambitious and expensive project that saves more per month but requires a decade or more to break even.

Promised savings from a single improvement may never materialize if the rest of your home isn’t energy efficient. Double-pane windows, for example, may reap little reward unless you properly seal and insulate a house, and tune up your existing HVAC system, says Stephanie Folk, a spokeswoman for CNT Energy, a Chicago-based non-profit group that helps consumers cut energy costs.

Sealing and insulating a home can be done relatively quickly and inexpensively with some weather stripping and caulk. Another low-cost step is to install a programmable thermostat, says Ronnie Kweller, spokeswoman for the Alliance to Save Energy. For about $100, the thermostat should shave 10% off heating and cooling bills, likely paying for itself within a year.

Set your own priorities

Don’t take a contractor’s word about which upgrades you need. When prioritizing home improvements, weigh costs and the amount of energy consumed, says Peter Ludwig, a project manager for CNT Energy. A gas furnace or boiler generally represents the biggest energy guzzler. A new high-efficiency furnace may run $3,500, about $1,100 more than a standard furnace, but it’ll lower energy bills by 20% on average.

An energy audit is a good first step to take before buying any new equipment. Conduct your own or hire a pro. A professional energy audit involves equipment such as blower doors, which measure building leaks, and infrared cameras, which find hard-to-detect air infiltration and missing insulation. Ludwig says the cost of a professional audit for a typical 2,000-square-foot home could range between $300 and $700, depending on the extent of testing.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.