News
Here are some recent news articals about Insulation, and energy conservation.
New Energy Bill Creates Hefty Tax Cuts
Source: Albuquerque Journal
Publication date: 2005-08-22
On Aug. 6, President Bush signed the Energy Tax Incentives Act of 2005, adding $14.5 billion in new tax cuts for individuals and businesses.
Individuals are most likely to be directly affected by incentives to conserve energy in their homes and their vehicles. Businesses have incentives to increase domestic energy production and to enhance the nation's energy infrastructure.
Several tax credits were created to encourage more energy- efficient homes. A tax credit represents a dollar-fordollar reduction in tax liability and is therefore more valuable than a tax deduction.
The residential home measures in the new bill apply to expenditures after 2005.
There are three general credits available for residential energy conservation. A 10 percent tax credit applies to expenditures for long-lasting improvements to a taxpayer's home. The improvements must be expected to last at least five years and must be made to a principal residence and not to a vacation home.
Qualifying improvements include insulation materials, exterior windows and doors and heat-reducing metal roofs. The maximum credit allowed is $500, of which no more than $200 can be for windows. Thus, $5,000 in qualifying roof improvements will cost only $4,500 after the 10 percent credit, but $5,000 in window improvements will cost $4,800.
Improvements must be made in 2006 or 2007.
A higher credit rate, 100 percent of eligible costs, applies to certain energy property added to a home. The maximum dollar credit allowed is $500, but a separate limit applies to three types of costs.
Advance main circulating fans are limited to a $50 credit, qualified furnaces are limited to $150, and heat pumps and central air conditioners are limited to $300. The statute defines qualifying property.
A smaller 30 percent tax credit, but subject to a larger dollar limit, applies to solar hot water ($2,000 maximum credit), photovoltaic ($2,000 maximum credit), or fuel cell property ($500 maximum credit for each .5 kilogram of capacity) added to a home.
The tax basis of a residence must be reduced by the amount of any credit claimed. This provision is common to many tax credits, but it's interesting because the 1997 Tax Act created an exclusion for gain realized from the sale of a principal residence and one explanation for the exclusion is that it eliminated the need to keep detailed records of the tax basis for a home.
Builders may also qualify for tax credits of as much as $2,000 per new home constructed with energyefficient measures that reduce heating and cooling energy consumption by 50 percent or more.
Current tax law allows a tax deduction for as much as $2,000 of the cost of a qualifying hybrid or other alternative fuel vehicle. Because the maximum federal income tax rate is 35 percent, this deduction will save no more than $700 -- 35 percent of $2,000 -- of the cost of a vehicle.
For most taxpayers, the savings are even smaller. The deduction applies only to purchased, not leased, vehicles.
The Energy Act also changed the deduction to a credit based on increased fuel economy and on lifetime fuel conservation savings. The fuel efficiency credit ranges from $400 to $2,400, with the savings based on how much the vehicle's fuel economy has increased from 2002 measures.
The conservation credit ranges from $250 to $1,000.
Both the fuel efficiency and the conservation credits apply only to vehicles first placed in service between 2006 and 2010. The credits apply to both purchased and leased vehicles, but only to the first 60,000 vehicles sold by a manufacturer during this period.
Of course, I have greatly condensed the details of how to qualify for the residence and vehicle credits and how to compute the savings. It will be interesting to see whether taxpayers will be able to understand the economic benefits available from the new credits and who will capture the benefits of the credit.
The theory behind tax incentives is that the consumer will be more likely to purchase qualifying property when the government shares in the cost.
However, if the demand for credit-eligible property increases, the benefit may be captured by the manufacturer in the form of higher prices.
At a minimum, the Energy Act proves once again that one doesn't need a tax bill to further complicate tax law.
James R. Hamill, CPA, Ph.D., is KPMG Professor of Accounting in the Anderson Schools of Management, University of New Mexico. He can be reached at hamill@mgt.unm.edu
