Be Green and Save Taxes

Want to be kind to the planet and your portfolio at the same time? The Fool shows you how in our special series on Earth-friendly investing.

There are a number of energy provisions embedded in the tax code. Many of them are for business, but there are personal tax savings opportunities as well. These provisions were originally signed into law in 2005 and were to last only a limited period of time, but recent legislation extended them. Using these credits can help you be green and save you some green at the same time.

New vehicle tax credits
The new law creates a batch of new tax credits that cover a wider range of alternative motor vehicles. These credits are available for new (not used) vehicles, both purchased and leased. The associated credit for each of the four eligible types of vehicles is based on a complicated set of rules. If you buy an eligible vehicle, you'll get a tax credit, but beyond that it gets a bit complex. Qualifying vehicles include:

  • Fuel cell vehicles: Buyers of vehicles that run on hydrogen fuel cells or similar technologies could get a tax credit of up to $12,000.
  • Hybrid vehicles: This provision covers vehicles that combine an internal combustion engine with a second propulsion system that uses a rechargeable energy source, such as electric batteries. A two-tiered credit system for these vehicles provides a credit between $650 and $3,400. And there are limits on the credit based on production. The Toyota Prius leads this category hands-down, based on 2006 production and sales figures. You can get more information by reviewing IRS Form 8910 and the related instructions.  
  • Alternative-fuel vehicles: A maximum credit of $4,000 applies to vehicles that can run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any fuel that's at least 85% methanol.
  • Advanced lean-burn technology vehicles: This credit covers vehicles with lean-burn engines, which adjust the fuel/air mix in the motor's cylinders to create the same combustion as regular cars with a significantly smaller amount of fuel.

Sadly, the law is so complex that you'll likely have to rely on the car's manufacturer to compute the appropriate credit amounts for you. And while these credits will reduce your regular tax, they won't reduce your alternative minimum tax (AMT).

Personal energy property credits
If you add specified energy-saving enhancements to your primary home (no vacation homes, no rental properties), you're eligible for this new credit. It's limited to a lifetime amount of $500 (that's your lifetime, not the lifetime of the home). Qualifying improvements include:

  • Exterior doors
  • Insulation designed to reduce heat loss or gain
  • Advanced main air-circulating fans
  • Metal roofs covered with heat-reducing compounds
  • Exterior windows, including those used in skylights
  • Natural gas, propane, and oil furnaces and qualified hot water boilers
  • Energy-efficient electric heat pumps, geothermal heat pumps, electric heat pump water heaters, and central air conditioners

Many of these items have their own lifetime limitations. For example, the lifetime credit for exterior windows is $200, while the credit for main air-circulating fans can't exceed $50 per item. Again, the rules are a bit complex; it's up to you to ensure that any improvements made to your home include these devices.

Personal residential energy-efficient property credit
Credits come and go, depending on how the political wind is blowing, and the credit for qualified solar water-heating equipment is making a comeback. The credit amounts to 30% of the cost of qualifying electricity-generating solar photovoltaic equipment, and it maxes out at $2,000. There's also a credit for 30% of the cost (with a maximum of $500 for each 0.5 kilowatt of capacity) for qualified fuel cell equipment.

In both cases, the equipment must be installed on your primary residence (again, no second homes or rental properties), and that residence must be in the U.S. Sorry, backyard partiers: The credit won't apply to equipment used to heat swimming pools, spas, or hot tubs.

So, help yourself while you help the planet by taking advantage of the energy credits provided by Uncle Sam.

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.

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