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Energy Incentives for Individuals in the American Recovery and Reinvestment Act

With 2010 almost over, the IRS reminds taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).

The recovery law provides tax incentives for first-time home buyers, people purchasing new cars, those interested in making their home more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

The American Recovery and Reinvestment Act provides tax incentives for individuals to invest in energy-efficient products.

Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT: Starting in 2009, the new law allows the Alternative Motor Vehicle Credit, including the tax credit for purchasing hybrid vehicles, to be applied against the Alternative Minimum Tax. Prior to the new law, the Alternative Motor Vehicle Credit could not be used to offset the AMT. This means the credit could not be taken if a taxpayer owed AMT or was reduced for some taxpayers who did not owe AMT.

Conversion Kits: The new law also provided a tax credit for plug-in electric drive conversion kits. The credit is equal to 10 percent of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle and placed in service after February 17, 2009. The maximum amount of the credit is $4,000. The credit does not apply to conversions made after December 31, 2011. A taxpayer may claim this credit even if the taxpayer claimed a hybrid vehicle credit for the same vehicle in an earlier year.

Plug-In Electric Vehicle Credit: The new law also creates a special tax credit for two types of plug-in vehicles certain low-speed electric vehicles and two-or three wheeled vehicles. The amount of credit is 10% of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two-or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit allowable.

Plug-In Electric Drive Vehicle Credit: The new law modifies the credit for qualified plug-electric drive vehicles purchased after December 31, 2009. To qualify, vehicles must be newly purchased after December 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of credit for kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer’s vehicles after the manufacturer has sold at least 200,000 vehicles.

Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amount and allows for a credit equal to 30% of the cost of qualified property.

Residential Energy Property Credit: The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30% of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as “energy efficient” for purposes of this tax credit.

For property purchased before June 1, 2009, homeowners generally can rely on the manufacturers’ certifications and Energy Star labels that were available at the time for those products. Manufacturers have been advised that they should not continue to provide certifications for property that fails to meet the new standards. The IRS has issued a notice that will allow manufacturers to certify that their products meet the new standards. Please note, not all ENERGY STAR qualified products qualify for a tax credit. For detailed information about qualifying improvements, visit the U.S. Department of Energy’s Energy Star Web site.