Reminder: 25C Tax Credits Limted by AMT in 2010

This reminder from Energy Star's tax credit FAQ:

"Section 25C" products (which include insulation, windows, doors, roofs, HVAC, and non-solar water heaters, at 30% up to $1,500) are NOT limited by the AMT in 2009, but are currently limited by the AMT in 2010, unless Congress amends the law.

The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you're already paying at least that much because of the "regular" income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax. Various tax benefits that are available under the regular tax (like these tax credits) are reduced or eliminated. More information - Alternative Minimum Tax 101

NOTE: 25D tax credits (geothermal, wind, solar) which extend through 2016 are NOT limited by the AMT.

Condo and Co-Op Owners Can Qualify for Tax Credit

This EPA Energy Star FAQ response addresses how condo owners or members of a co-op who use their unit as their primary residence and share the cost of a qualifying energy efficiency improvements to a condo building can claim the improvement's assessment amount for the residential energy efficiency tax credit.

2009 IRS Form 5695 Released, Causing Confusion

The IRS has released the 2009 version of Form 5695 which homeowners must use to claim the tax credit for residential energy efficiency improvements such as HVAC upgrades. The form appears to be factually correct, but extremely confusing while it tries to address the qualifying level for air source heat pumps which changed on February 17, 2009 when ARRA was enacted. HARDI and other industry organizations worked with the EPA's Energy Star staff to issue this clarification which reinforces that air source heat pumps needed an HSPF of 8.5, not 9.0 if installed after February 17, 2009.

Clarification on Certified Properly Matched Systems

To qualify for the central air-conditioner or split heat pump tax credit, the indoor and outdoor equipment must be a certified proper match. Here is a simple explanation for homeowners:

Replacing Split Systems to Achieve Tax Credit Level Efficiencies-

When replacing a split system (either air conditioning or heat pump), consumers are sometimes confused as to which components need to be replaced to achieve an efficiency rating high enough to qualify for the Federal Tax Credit. This is because there are really three components that are required to make a 'system'. The outdoor unit (whether it be air conditioner or heat pump) is rated along with the indoor coil (or air handling unit which contains the indoor coil), and the air moving device which may be a furnace or the blower section of an air handling unit. To further complicate matters, an air handling unit may sometimes be called an 'electric furnace' as it is just an air handling unit (blower and indoor coil) with an electric heater for supplemental heating. All of these three components work together to define the efficiency of the air conditioning or heat pump system. While it is easy to see that the outdoor unit must be properly matched with an indoor unit to obtain the desired efficiency, the power consumed by the air moving device (the blower section of the furnace or air handling unit) plays a critical role i n the overall efficiency of the system. Many of the higher rated systems depend on an advanced technology main air circulating fan to achieve these higher efficiency levels. Since most older furnaces or air handling units lack these high efficiency (advanced technology main air circulating fan) blowers, the replacement of the furnace or air handling unit becomes a necessary part of the replacement system in order to achieve targeted efficiency levels for the air conditioning or heat pump system. Properly matched indoor and outdoor equipment systems are certified by manufacturer so products from two different manufacturers will not match.

Homeowner Tax Credit Guidance Finally Issued By IRS

The IRS has finally released a guidance document for the residential energy efficiency tax credits that were expanded and extended by ARRA, the stimulus bill. This guidance document specifically addresses the confusion surrounding the advanced main circulating fan tax credit, essentially reinforcing HARDI's interpretation that if the furnace does not qualify (sub-95% AFUE) then only 30% of the equipment and labor costs specific to the advanced fan to up to $1,500 are eligible for the tax credit. Here is the section from the guidance document:

Natural Gas, Propane, or Oil Furnace with an Advanced Main Air Circulating Fan. If a natural gas, propane, or oil furnace is qualified energy property, the entire amount paid or incurred to purchase and install the furnace, including any costs attributable to the furnace’s main air circulating fan, are taken into account in determining the amount of the credit under § 25C. If the furnace is not qualified energy property, but the furnace’s main air circulating fan is qualified energy property, only the amount paid or incurred to purchase and install the fan are taken into account in determining the amount of the credit under § 25C. In such a case-- (1) The amount paid or incurred to purchase and install the main air circulating fan may be determined by any method that reasonably allocates costs between the fan and other components of the furnace; (2) The manufacturer of the furnace may determine, using any reasonable method, the percentage of the cost of the furnace that is allocable to the fan and inform taxpayers of the percentage in the certification it provides under section 6 of this notice; and (3) A taxpayer may treat this percentage of the total amount paid or incurred to purchase and install the furnace as the amount paid or incurred to purchase and install the advanced main air circulating fan. If a manufacturer certifies the percentage of the cost of the furnace allocable to an advanced main air circulating fan, the manufacturer must maintain in its records the basis for such allocation. The manufacturer must, upon request, make such documentation available for inspection by the Service.

Here is Energy Star's FAQ response to the advanced fan credit question as well in case your customer is seeking additional information.

Q: **Update** How does the Advanced Main Circulating Fan credit work?

A: The stimulus bill expanded the tax credit for advanced main circulating fans from a straight $50 credit for any furnace equipped with such a fan to 30% up to $1,500 for advanced main circulating fans that account for less than 2% of the furnace's total annual energy used (based on standard Department of Energy test procedures). There remains uncertainty how the credit can be claimed on an advanced fan installed as part of a non-qualifying furnace (less than 95% AFUE). HARDI just received indication from the IRS that they are currently intending to interpret this credit to mean that any advanced fan-equipped furnace that has less than a 95% AFUE can only qualify the costs specific to the advanced fan, not the entire furnace, for the tax credit. Equipment manufacturers are currently pursuing and expedited official IRS clarification that will hopefully provide concrete certainty soon, but the latest indication is that only the costs specific to the advanced fan will qualify for the tax credit on furnaces less than 95% AFUE. HARDI advises that members refer to their tax professionals before recommending to customers what will and will not qualify for this tax credit.

**Update on Non-Refundable Tax Credits

As an update to this earlier post regarding these "non-refundable HVAC tax credits", here is a boiled down recommendation on how contractors should explain these tax credits to homeowners:

The HVAC tax credits are non-refundable tax credits which means that they can only be claimed if the taxpayer owes as much or more in taxes than the tax credits they are filing for. This can vary tremendously from taxpayer to taxpayer due to personal or household deductions, other credits, and the Alternative Minimum Tax so homeowners need to check with their tax advisor to determine whether they will most likely be able to qualify for a $1,500 tax credit.

**Updated** Q: Are these tax credits limited by the AMT?

A: The original 2006-2007 tax credits were limited by the Alternative Minimum Tax, but the American Recovery and Reinvestment Act of 2009 lifted that limitation for these expanded residential energy efficiency credits for 2009. This tax credit claimed in 2010, however, is still limited by the AMT unless Congress amends the credit again.

The geothermal, solar, and wind upcapped tax credits are also not limited by the AMT through 2016. When these credits are not limited by the AMT, the taxpayer's total tax credit limit is determined by the sum of the taxpayer's tax liability PLUS the AMT.

Q: If a homeowner claims a $1,500 credit for installing a qualified appliance, are they still eligible for the solar or geothermal credit?

A: Yes. The capped $1,500 tax credit for most HVAC equipment is separate from the uncapped geothermal, solar, and wind tax credit. For example, a homeowner could install a qualifying water heater and claim 30% of the installation costs up to $1,500 then install a geothermal heat pump and claim up to 30% of that total installation cost as well.

Q: What if two components are being installed but only one qualifies for the tax credit?

A: For example, a non-qualifying central air-conditioning system is installed at the same time as a qualifying gas furnace (or vice versa). In this case, only 30% of the costs, up to $1,500, associated with the furnace installation would qualify for the tax credit. Energy Star just updated their FAQ on this as well.

Q: Can total installation costs be included in a claim for these tax credits?

A: For HVAC, geothermal, solar, and wind installations, yes, but only material costs qualify for windows, insulation, and roofing improvements. Energy Star recently updated their FAQ site on this point which you can see here.

Energy Star Updates Answer to Advanced Fan Credit Question

Energy Star recently posted this answer to their FAQ's which was reviewed and approved by the IRS regarding how to determine what qualifies for the advanced main circulating fan tax credit. This is still unresolved but HARDI and other industry groups are working together to expedite a detailed IRS determination.

Q: Are the residential rental properties eligible for these tax credits?

A: For the capped $1,500 credits (most HVAC), no because those are limited only to primary residence equipment replacements. Geothermal, wind, and solar installations are extended to any residence of the taxpayer (doesn't have to be primary) but do not appear to extend to rental properties.

Q: Is this a refundable or non-refundable tax credit?

A: The residential energy efficiency credits are non-refundable tax credits which mean that they cannot bring a taxpayer's annual tax liability below zero. NOTE: this is not related to refund amounts when filing taxes. This tax credit is available to any taxpayer whose income generates more than $1,500 in taxes owed annually.

Q: Do electric water heaters qualify for the tax credit?

A: Only electric heat pump water heaters with energy factors of 2.0 or greater qualify for the residential tax credit. Gas, oil, and propane water heaters must energy factors of .82 or greater OR have a thermal efficiency of at least 90%.

Q: Do improvements to manufactured housing qualify for this tax credit?

A: Yes. Here is the specific language regarding eligible improvements to manufactured houses:

The term “dwelling unit” includes a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (section 3280 of title 24, Code of Federal Regulations).

Q: Did this stimulus bill do anything for commercial buildings?

A: There are significant appropriations and potential for funding for energy efficiency improvements to government buildings, public housing, and schools in this stimulus bill, but standard commercial buildings were already offered a tax credit of up to $1.80/sq ft for energy efficiency improvements that reduce heating and cooling energy consumption by at least 50% as part of the 2008 "bailout bill". There is also a $.60/sq ft tax credit available for smaller efficiency improvements to commercial buildings. You can find more detail about these commercial credits here.

Q: Does the final installed cost qualified HVAC equipment include sales tax?

A: Yes. The tax code language states "amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during such taxable year" which HARDI and Energy Star interpret as the final cost which would include sales tax. However, sales tax on non-qualifying work performed on that same installation should not be included when determining the credit-eligible amount.

Geothermal Heat Pumps in New Residential Construction Appear to Qualify

It now appears that geothermal heat pumps installed in residential new construction, as well as other on-site generation systems such as solar electric and solar hot water heating, do qualify for this increased tax credit. Check out this page for more information and check back for future updates as we work to get more verification on this.

Q: Is this a tax credit or tax deduction?

A: While the IRS is not expected to release the updated forms and instructions for filing for this residential energy efficiency tax credit for several months, the IRS has clarified that this is a non-refundable tax credit. That means that the credit cannot reduce a taxpayer's annual tax liability below zero. This is separate from the refunds received after filing, which has to do with deductions, exemptions, and the level of paycheck withholdings. Essentially, this non-refundable tax credit is available to any taxpayer whose annual tax liability exceeds $1,500. Here's more on how homeowners should file for this credit.