Energy Incentives for Individuals: Questions and Answers
Update June 2016 — For updated information on the residential energy property credit, please see Energy Incentives for Individuals: Residential Property Updated Questions and Answers. For updated information on plug-in vehicles, please see Plug-In Electric Drive Vehicle Credit (IRC 30D).
Q. How has the American Recovery and Reinvestment Act of 2009 affected the tax credits for energy efficient home improvements?
A. 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 percent 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.
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. The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards. See Notice 2009-53.
Q. What improvements qualify for the enhanced residential energy property credit for homeowners?
A. In 2009 and 2010, an individual may claim a credit for 30 percent of the cost (subject to the overall credit limit of $1,500) for the installation of the following qualifying products:
- Energy-efficient exterior windows, doors and skylights
- Energy-efficient heating and air conditioning systems
- Water heaters (natural gas, propane or oil)
- Roofs (metal and asphalt)
- Biomass stoves
Q. Who qualifies to claim a residential energy property credit? Are there limitations?
A. You may be able to take these credits if you made energy saving improvements to your personal residence. This credit is limited to improvements placed in service during 2009 and 2010 up to a total credit of $1,500 for both tax years combined.
The residential energy property credit is non refundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.
Q. Are there incentives for making your home energy efficient by installing alternative energy equipment — for example, installing a solar hot water heater?
A. Yes, the residential energy efficiency property credit has been enhanced to remove some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property. Qualifying property includes solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. For more information, see Notice 2009-41, which explains the effects of this change.
Q. Is there a limitation on the amount of the residential energy efficiency property credit?
A. The American Recovery and Reinvestment Act (ARRA) eliminates the dollar limit on the 30 percent tax credit for alternative energy equipment, such as solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. The cap generally has been eliminated for these improvements beginning in the 2009 tax year.
ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, doors and skylights, certain water heaters, metal and asphalt roofs, biomass stoves and energy-efficient heating and air conditioning systems.
Q. For tax years beginning in 2009, the law allows a 30 percent tax credit, with no cap, to a homeowner for the cost, including installation costs, of solar electric equipment (photovoltaic). This credit provides a great incentive to homebuilders and homebuyers to install this equipment. For purposes of this tax credit, does the cost to the homebuyer of the installed solar electric equipment include a builder’s normal construction mark-up?
A. The homebuyer must make a reasonable allocation of the cost of a home to determine the cost allocable to the solar electric equipment on which a homebuyer computes this credit. The cost of the solar electric equipment may include a reasonable allocation of the homebuilder’s construction mark-up. The homebuilder should provide the buyer with information necessary to make this allocation.
Q. How has the American Recovery and Reinvestment Act of 2009 affected tax credits for plug-in electric vehicles?
A. Plug-in electric vehicles using certain types of batteries may qualify for a new tax credit. The Emergency Economic Stabilization Act of 2008 (EESA) and the American Recovery and Reinvestment Act of 2009 (ARRA) created two new tax credits for various types of plug-in electric vehicles, which may include what are commonly referred to as neighborhood electric vehicles.
Q. What types of credits are available for qualified electric plug-in vehicles?
A. EESA created a tax credit (plug-in electric drive motor vehicle credit) for vehicles that have at least four wheels and draw propulsion using a rechargeable traction battery with at least four kilowatt hours of capacity. For 2009, the minimum credit is $2,500 and the credit tops out at $7,500 to $15,000, depending on the weight of the vehicle and the capacity of the battery.
ARRA creates a tax credit (plug-in electric vehicle credit) for low-speed or two- or three-wheel electric vehicles, such as motor scooters, purchased after Feb. 17, 2009, and before Jan. 1, 2012. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500. To qualify, a vehicle must be either a low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours or be a two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.
If the individual qualifies for both the plug-in electric vehicle credit and the plug-in electric drive motor vehicle credit, then the plug-in electric drive motor vehicle credit should be claimed.
During 2009, low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) may qualify both for the plug-in electric drive motor vehicle credit and, if purchased after Feb. 17, 2009, for the plug-in electric vehicle credit. A taxpayer may not claim both credits for the same vehicle. Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.
Notice 2009-54 provides certification procedures for the plug-in electric drive motor vehicle credit for vehicles purchased in 2009. The IRS is working on guidance regarding certification procedures for the plug-in electric drive motor vehicle credit for vehicles purchased after 2009. Notice 2009-58 provides certification procedures for the plug-in electric vehicle credit.
Q. What does “acquired” mean for purposes of the plug-in electric vehicle credit (ARRA Section 1142) and the plug-in electric drive motor vehicle credit (ARRA Section 1141)?
A. A vehicle is acquired under the laws of the state in which the vehicle was purchased. Generally, under state law, a binding contract to purchase a vehicle by itself does not count as acquiring a vehicle. For a taxpayer to have acquired the vehicle, he or she must have title to it under state law.
Q. What are the qualifying requirements for a plug-in electric drive vehicle purchased after Dec. 31, 2009?
A. ARRA modifies the plug-in electric drive motor vehicle credit for vehicles purchased after Dec. 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 the credit for qualified plug-in electric drive motor vehicles is $2,500 and the credit tops out at $7,500 depending on the battery capacity of the vehicle. The credit will begin to phase out with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles.
After Dec. 31, 2009 a vehicle cannot qualify for both the plug-in electric vehicle credit and the plug-in electric drive motor vehicle credit.
Q. Can a taxpayer claim a credit for installing an electric drive conversion kit?
A. Yes. ARRA provides 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 Feb. 17, 2009. The maximum amount of the credit is $4,000. The credit does not apply to conversions made after Dec. 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.
Q. Does the Alternative Minimum Tax (AMT) impact the alternative motor vehicle credit?
A. 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.