On Aug. 8, 2005, the president signed into law the Energy Policy Act of 2005. Most of the provisions of the law affect various businesses, but why should they have all the fun? Energy-savvy citizens can also enjoy the benefit of several new tax credits.
New vehicle tax credits
Beginning in 2006, you can bid farewell to the current tax deductions for new hybrid gas-electric passenger cars such as the Toyota Prius. Don't feel blue -- 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, that are placed in service after Dec. 31, 2005.
The associated credit for each of the four eligible types of vehicles is based upon 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:
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Fuel cell vehicles
-- Buyers of vehicles that run on hydrogen fuel cells or similar technologies could get a tax credit up to $12,000.
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Hybrid vehicles
-- Just in case prospective Prius buyers were feeling left out, 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.
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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, and it applies only to items placed into service between the beginning of 2006 and the end of 2007. 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 complex; it's up to you to ensure that any improvements made to your home include these devices. I'm sure that by the time 2006 rolls around, all of the major home-improvement stores will be able to provide specific information regarding these credits.
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 for 2006.
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) after Dec. 31, 2005, 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.
There are also credits for manufacturers of energy-efficient appliances and for builders of energy-efficient new homes. You might benefit if those builders and manufacturers pass their savings on to you -- but there's no requirement for them to do so.
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