The Federal Government has authorized Income Tax credits for home improvements that are energy efficient and carry the ENERGY STAR rating. Some home improvements that qualify for the 2009 credit are windows, doors, and insulation.
A tax accountant will explain that a credit is different than a deduction in that the credit adjusts the amount that is owed the Federal Government when filing taxes while the deduction is a line item that reduces the Adjusted Gross Income, or AGI.
In many ways the credit is more beneficial because it does reduce your tax liability directly and is not computed in the figure for your taxes through the AGI.
Let’s say you are in a 25% tax bracket and your AGI is $1,000 with a $100 deduction. Your taxes owed on that $1,000 is $250 for your bracket. Before the $100 deduction your AGI is $1,100, or $275 in the 25% tax bracket. But now figure in the $100 credit and your liability is $100 less, or $175. The difference between the deduction at $250 and the credit at $175 is another $75 savings for you.
Of course your tax situation may not be this easy to calculate the difference. Through the American Recovery and Reinvestment Act of 2009, an energy efficient improvement that qualifies can reduce your tax exposure by the maximum allowable amount of $1,500. You can qualify for up to 30% of the investment. A partial list of home improvements that qualify can be found at the improveitusa.com website.
If you are thinking of saving money on a more energy efficient home, don’t forget to add in the credit into your savings. The energy savings alone will pay for itself, this is an added incentive.