HVAC Tax Credits in the 2009 Stimulus Package

Adapted from information by Charlie McCrudden, ACCA

Slowly, we are all becoming well-acquainted with President Obama’s American Recovery and Reinvestment Act of 2009 (ARRA) into law.  The bill combines spending and tax incentives designed to get the American economy moving again by investing in our nation’s road and energy infrastructure, and increasing efficiency and performance of America’s homes and commercial buildings.  The new law makes important changes to existing tax incentives for homeowners who make qualified improvements of higher efficiency HVAC water and heating equipment to their primary residences. 

So, what’s changed for homeowners?

Larger Tax Credit

For qualified improvements*, homeowners may be able to claim tax credits equal to 30% of the installed costs (up to $1500.)

Longer Term

The new tax credits are retroactive to January 1, 2009, and expire of December 31, 2010.  The $1500 limit is for all improvement made during the two year term, not $1500 each year.  (But note that the $1500 limit does not apply to solar!)

Per-Appliance Caps Removed

Homeowners may use the entire $1500 tax credit limit on a single qualifying improvement.  The previous per-appliance caps that limited the homeowner to just $150 for a high efficiency furnace or $300 for a high efficiency central air conditioner or heat pump have been removed.

Lifetime Limit Removed

Homeowners that previously claimed tax credits in 2006 or 2007 are eligible for the full $1500 limit.

Frequently Asked Questions About the New Tax Credits

Can a homeowner claim $1500 in tax credits for 2009 and another $1500 in 2010?

No.  Taxpayers may be eligible for a total of $1500 in tax credits for improvements between 2009 & 2010.

Can a homeowner use the entire $1500 limit for replacing one appliance?

Yes.  A homeowner may use the entire $1500 tax credit for installing a single appliance, such as a qualified furnace, air conditioner, heat pump or hot water heater.

What happens if 30% of the installed costs is less than $1500?

The homeowner can “bank” the remaining available tax credit for other qualified improvements.  Any single installation that costs more the $5000 will instantly reach the $1500 limit.

How will the taxpayer claim the credit and receive their money?

In the past, the IRS has directed taxpayers to use Form 5696, Residential Energy Efficient Property Credit.  Taxpayers are not required to file anything more than a form, but are instructed to keep records of their installation.

What’s the difference between a tax credit and a tax deduction?

A tax credit applies against the taxpayer’s liability.  A tax deduction applies against a homeowner’s income, lowering the adjusted gross income and possibly moving the taxpayer to a lower tax bracket.  Tax credits have a greater benefit to a taxpayer.  For example, with a $1500 tax credit, if the homeowner owes $2000 in taxes, their liability is reduced to $500.  If they own nothing, they can expect to receive a $1500 refund.

What if the homeowner has already claimed $500 in tax credits for 2006 or 2007?

The “Lifetime Caps” that used to be in place have been removed.  Any previous claims do not apply to this $1500 limit.

Can a homeowner claim the credit for improvements to a second home?

No.  The tax credit is only available for improvement to the taxpayer’s primary residence.

Can a small business that operates out of a townhouse and installs residential equipment in a commercial setting claim the tax credit?

No.  The tax credit may only be claimed by taxpayers on their personal income taxes for improvements to their primary residences.

What other types of energy efficiency improvements qualify for the tax credits?

Homeowners may qualify for the tax credits if they make qualified improvements to: windows and doors including skylights, storm windows and storm doors; roofing including metal and asphalt roofs; and insulation, in additional to everything listed on the front page.  All of these improvements qualify, but the homeowner may only claim a total of $1500  for all improvements.