Stimulus plans brings green home improvement tax breaks

Energy-saving systems for the attic, basement, and in between have effectively gone on sale, courtesy of the United States Congress.

But whether shoppers will take advantage – or even notice available discounts – remains an open question.

Tax incentives to encourage investments in energy efficiency took effect last week when President Barack Obama signed the $787 billion economic stimulus bill. That means homeowners with drafty windows, old heating systems, or other root causes of high energy bills can be rewarded in tax season if they make improvements in 2009 or 2010.

"This is by far the most the federal government has done in the past several decades" to reward energy-efficiency investments, says Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, a nonprofit organization in Washington, D.C. "In many cases, this will make the high-efficiency product cheaper than the low-efficiency product. [For consumers], this is pretty lucrative, and I'd be surprised if it gets extended into 2011."

New incentives increase the size of tax credits for homeowners who buy qualifying products. For instance, those who invest in highly-rated insulation, replacement windows, duct seals, or high-efficiency heating and cooling systems can now receive a tax credit worth 30 percent of the upgrade cost (maximum credit value: $1,500).

Previously, homeowners could get a tax credit worth just 10 percent of an upgrade cost, up to a maximum of $500. Now, taxpayers who spend $800 on an efficient water heater, $1,000 on insulation, and $2,000 on windows could lop $1,140 off their federal tax bill.

Awards for switching to renewable energy sources have become especially generous. Congress this month did away with caps on 30 percent tax credits for homeowners who install solar panels, geothermal heat pumps, or windmills. Now a $24,000 investment to make a home solar-powered would generate a federal tax credit worth $7,200. (Before the stimulus, credits were capped at $2,000 for geothermal and solar; $4,000 for wind).

These tax code revisions have altered the affordability ballgame, says Craig Perkins, executive director of the Energy Coalition, a nonprofit in Irvine, Calif., that helps consumers become more energy-efficient. He estimates more than 1 in 4 Californians can now borrow to install solar panels and immediately be paying less out-of-pocket per month (including payments on solar panels) than if he or she were to keep getting power from conventional sources. Others, he says, will often recoup the costs of adding solar or high-efficiency air conditioning over a few years.

One key to maximizing savings, Perkins says, is to choose projects that qualify for a rebate from one's state or utility and are also eligible for a federal tax credit. Such "piggybacking" is both permissible and encouraged. The challenge: getting consumers to research options and take action.

"The problem we find constantly is that [navigating incentives] can be extremely confusing," Mr. Perkins says. "People don't want to become wonks about what's eligible and what isn't.… It's the nuts and bolts of making it happen that really stops a lot people."

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