On April 16, 2013, the Congressional Research Service published a report on home energy efficiency tax credits for consumers. The report is available here. The tax credits arise under Sections 25C and 25D of the Internal Revenue Code. The tax credits are available to individuals without regards to the passive activity loss rules that generally limit the ability of individuals to use tax credits.
The Section 25C credit is for the purchase of energy efficient windows and doors and energy efficient mechanicals, such as air conditioners, heat pumps and hot water heaters. The credit for windows and doors is for 10 percent of the cost of the windows or doors and has a lifetime cap of $200. For the energy efficient mechanicals, each item of equipment has its own tax credit amount and all of the mechanicals have a lifetime cap of $500. The Section 25C credits are not available for vacation homes, investment properties or any new construction. The Section 25C credit may not be carried forward or back, so if the taxpayer does not have a tax liability in the year in which the improvements are made the credit is of no value. The credit expires at the end of this year.
The Section 25D credit is discussed in the post below of April 22, 2013. Please see full report available here.
The report is relatively critical of these credits. First, the report highlights problems with fraudulent claims. Second, the report suggests that most of the taxpayers that claim the credits would make the improvements without the credits. Third, the report asserts that lower income individuals who need the credits to afford these improvements are unlikely to owe any federal income tax, so the credits are of no value to them. It appears that the report’s analysis is questionable with respect to lumping the Section 25D and the Section 25C credits together in a single critique. The report’s critique may very well be valid with respect to the Section 25C credit for windows and mechanicals. For those items, the taxpayer is generally replacing an existing item that needs to be replaced in relatively short order. In such circumstances, most people will select the energy efficient item over the non-energy efficient item, even it means a slightly higher cost. However, the solar panels covered by the Section 25D credit are a different dynamic. They cost tens of thousands of dollars and are a significant capital improvement, rather than merely replacing a broken item. Therefore, the Section 25D credits do promote investment in renewable energy that would not be made in absence of the credit. Further, it makes the residential solar market more healthy for homeowners to have the ability to claims the tax credit themselves, rather than being dependent on a solar investment company to monetize the credit for them.