If you're an American homeowner you're probably looking for any way you can use your home as a means of reducing your tax liability. For some people, that's one of the primary reasons for buying a home rather than continuing to rent. One of the ways you can use your home to your tax advantage is through the home energy tax credit. This tax credit was established in 2005 as a means of encouraging homeowners to make improvements to their property that would ultimately increase energy efficiency.
The home energy tax credit is also sometimes referred to as the home improvement tax credit. Regardless of the name used, it is a tax credit that was greatly expanded for the 2009 and 2010 tax years. Unfortunately, it has been reduced for the 2011 tax year to the point that many homeowners won't bother trying to take advantage of it. Regardless, if you do make any qualifying home improvements in 2011 you will be able to claim the credit on next year's tax return.
Qualifying Improvements
Since the purpose for the credit is to improve energy efficiency in the home, almost anything you do that can be proven to increase energy efficiency will qualify. That being said, some of the most common qualifying home improvements people make include installing new windows and doors, insulating attics and basements, purchasing new, energy-efficient appliances, and replacing old water heaters and furnaces.
Roofing also applies in some circumstances, but you'll probably have to install a government-certified metal or asphalt roof. Simply calling the neighborhood roofing contractor to throw anything on your home probably won't cut it. A government-certified roofing system includes specific types of roofing tiles, special construction methods, and manufacturer guarantees and warranties. Being that roofing is such an expensive venture, you'd be wise to check with your contractor about whether or not his product is certified.
Claiming the Credit
In order to claim the home energy tax credit you need to be aware of some restrictions and requirements. First and foremost, the improvements must be made to an existing home that is your primary residence. You cannot claim the credit for improvements made at a vacation home, a rental property, or a home belonging to a family member. This is true even if you paid for the materials yourself. If you are a renter, you also cannot take the claim even if you paid for the home improvements.
The credit also must be claimed on an existing home. That means you cannot build a new home and then take the credit by choosing specific "upgrades" your builder might offer. It is assumed that a new home is being built as energy efficiently as possible, thus making the credit available to you. However, if it makes you feel better, the energy efficiency of the typical new home means you will save money in the long run.
If you plan to take the credit for home improvements you've made, be sure to get a Manufacturer Certification Statement for any products and supplies you purchase. If you are a DIY kind of person, you will get the statements either from the home improvement store where you bought your supplies or directly from the manufacturer. If being handy is not your strong point, you'll get the statements from any contractor you hire to do the work for you. Any manufacturer certification statements you acquire should be filed with your personal records. You don't need to send them in with your tax return, but you'll need to produce them in the future if you're ever audited.
Home Improvements without the Tax Credit
Critics of the home energy tax credit are quick to point out that for 2011 it has been reduced to a measly $500. If you understand what a tax credit does, you know that it doesn't put $500 back in your pocket. All it does is reduce your taxable income at the end of the year. For homeowners who do not have enough deductions to make itemization worthwhile, the credit actually becomes a moot point. But that should not stop you from making energy-efficient home improvements.
Anytime you can make improvements that will reduce your energy consumption, you will be saving money in the long run. If you consider that energy-efficient furnace for example, remember that your furnace is a 20 to 30 year investment. If you can save even 5% on your energy bills over the course of 30 years, that adds up to an awful lot of money. Tax credit or not, energy-efficient home improvements are almost always a good idea.