As the year is winding down, you may be considering some ways to lesson your 2009 tax burden. Should you take advantage of the federal tax credits Congress has provided certain energy efficiency expenditures? Well, maybe. This post is intended to help you understand these tax credits of energy expenditures and decide if they are for you.
Photo via marchetti via Flickr
First, an overview of credits available through The American Recovery and Reinvestment Tax Act of 2009:
If your house needs energy efficient improvements and you are financially able to pay for these improvements, you may assume that these tax credit purchases are a no-brainer. Not so fast.
I discovered an interesting note on the Environmental Protection Agency web site:
“These tax credits are available for a number of products at the highest efficiency levels, which typically cost much more than standard products.”
Hmmm. Did you get that part about much more? The question you must answer is “Should I spend whatever the much more amount is in order to get the products which will qualify for the tax credit?”
Here is how to approach it: compare the costs of the products that qualify for the tax credit with similarly efficient products that don’t. If the qualifying products don’t cost over 30% more than the non-qualifying ones, then spend up to $5,000 on those that qualify and take your tax credit. Why $5,000? Because most credits max out at $1,500, which is 30% of $5,000. Things get a bit more dicey when you have to pay over 30% extra in order to get that credit or when you are spending more than $5,000 total. I would forgo the tax credit, for example, if I had to pay twice as much for a product that is only marginally more efficient.
If you are considering a water heater or HVAC system, compare the estimated annual usage expenditures to learn what each option should cost to operate, then divide the annual energy cost savings into the extra you pay for the more efficient system to learn how many years of energy savings it will take to recoup that additional upfront cost of the more efficient unit. This nifty calculator will make it a breeze. For example, if the qualifying HVAC costs $8,000 and saves $400 annually over a less efficient system that costs $6,000, you would recoup your upfront cost in five years ($8,000 minus $6,000 = $2,000 extra upfront. $2,000 divided by annual savings of $400 = five years). If you use all your tax credit for this HVAC, you could subtract the credit of $1,500 from the $8,000 cost for an “after tax” cost of $6,500, allowing you to recoup the extra (now only $500) in a little over one year. Obviously, this is something you should do.