Energy Efficient Tax Credits: Do Your Research First

by Louis

Being a tax geek, excitement ran through my veins when my wife said we needed to buy a new water heater.

That’s right, excitement!

Our gas water heater was more than 20 years old and needed to be replaced. Knowing that there have been recent incentives to purchase energy efficient water heaters, I was all set to purchase a new water heater and tell my wife that we would get a tax credit when we file taxes to boot.

However, after researching the topic further, my dreams of qualifying for a much needed tax credit virtually disappeared.

Not Energy Efficient Enough

As you may know, if an appliance has an ENERGY STAR label on it, the U.S. government has determined that the appliance is energy efficient. In fact, the government states:

If looking for new household products, look for ones that have earned the ENERGY STAR rating. They meet strict energy efficiency guidelines set by the EPA and US Department of Energy.

ENERGY STAR appliances usually cost more than other appliances because of their efficiency.

Since advertisements at many major retailers state something along the lines of “Receive Up to a $1,500 tax credit by investing in energy efficient improvements to your home” and knowing water heaters were one of the qualified improvements, I initially assumed that all ENERGY STAR water heaters would qualify.

After looking at the specific requirements of the credit, I realized this was not the case.

Summary of the Tax Credit

In the recently enacted stimulus bill, the federal tax credit for energy efficiency was greatly expanded. For qualified purchases in 2009 and 2010, tax credits are now available for 30% of the amount paid for qualified energy efficiency improvements installed, up to $1,500.

Installation costs are covered by the tax credits for certain improvements, but not others. Unlike many tax credits, there is no upper or lower income limit for the energy efficient tax credits. Tax credits are available for certain windows and doors, insulation, roofs, HVAC, water heaters, and biomass stoves.

But an ENERGY STAR rating is not sufficient to qualify for certain home improvements. For example, only ENERGY STAR gas tankless water heaters qualify. Currently, no qualified ENERGY STAR gas storage tank water heaters qualify because of the specific energy thresholds determined under the credit.

A full, detailed listing of qualified energy efficiency improvements are listed by Energy Star here.

My Experience

After conducting research, we decided to forgo the tax credit. Like many homes, our water heater is a gas storage tank. There have been mixed reviews on the performance of gas tankless water heaters and, while more efficient, are initially more expensive.

For example, Home Depot’s cheapest gas tankless water heater model is listed at $845. However, an ENERGY STAR 50 gallon 12 YR water heater (a top-of-the line gas storage water heater) is $588. In addition, installation costs for a tankless water heater are usually more expensive if a house does not have a tankless water heater already.

I arrived at a local home improvement store to purchase the water heater. To my surprise, the salesman proceeded to tell me that all ENERGY STAR water heaters qualified for the credit. It’s a good thing I did my homework and knew otherwise.

Do your research first. If you’re considering making an energy efficient improvement, view the detailed listing of qualified energy efficient improvements before making your purchase.

This post is not responsible for providing readers with specific tax advice and encourages readers to consult with their own tax advisors to confirm their specific tax consequences, including any state, local, or foreign tax considerations.

{ 4 comments… read them below or add one }

sekishin July 7, 2009 at 10:47 am

We just had window tint installed on the windows of our house. Primarily to cut the cooling cost and keep the front of the house cooler (where my spouse telecommutes five days a week). We looked into the tax credit (for window tinting, installation is not counted, only material costs) and for the amount of tax credit we would receive (~$150) it was just not worth the hassle of a future audit – so are not counting in our tax returns. But still think it was worth it to have the tinting done – the A/C is now “keeping up” in all the rooms.

Lee Distad July 7, 2009 at 11:16 am

It’s a similar situation here in Canada with the Home Renovation Tax Credit.

Only a very limited number of home upgrades qualify for the 15% tax rebate, and only to a maximum of $10,000. Canadians need to seriously read the fine print before going crazy on home improvements.

P B July 27, 2009 at 10:22 pm

Note that tankless water heaters may be a good alternative for businesses as well as homes. Pubs, Restaurants, Hotels, Motels, and more, all use TWH’s for the very large cost savings, being able to expense or depreciate the up-front costs. So if you have an in-home business, or you just want to make points with your boss by cutting expenses, keep that in mind.

sarah evers September 20, 2010 at 5:14 pm

my husband and I are retired , pay no taxes but are hoping to install replacement windows in our home…i am having trouble finding information as to whether we would receive a rebate since we do not pay taxes…any information?

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