Tax-wise home improvements

Situation: Your clients have filed their 2008 federal and state tax returns. The couple is putting last year behind them. They have been surviving the economic downturn and realize that things are looking better. Although the couple has capital loss carry-forwards from 2008, they are still looking for ways to reduce their taxes. They are currently contributing the maximum amount to their 401(k) plans as well as to a Roth individual retirement account. You recall that the couple had put off making some improvements to their home in 2008 because of the economic uncertainty. They had added some replacement windows to their home in 2007 and used the life time energy credit of $500 at that time. Both you and the couple are wondering whether there are any improvement to their home they could make that would help them taxwise. Solution: The American Recovery and Reinvestment Act of 2009, signed In April, provides energy incentives for both individuals and businesses. ARRA increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate from 10% to 30% of the cost of all qualifying improvements and raises the maximum credit limit from $500 to $1,500 for improvements placed in service in 2009 and 2010. The $1,500 is not a lifetime limit, but rather, a credit for both years. A qualified energy efficiency improvement is an energy efficient building envelope component that meets the criteria set forth in the 2000 International Energy Conservation Code (IECC), as in effect on Aug. 8, 2005, or a metal or asphalt roof that meets the Energy Star Program requirements (Code Sec. 25C(c)(1)). Building envelope components include insulation materials, exterior windows and skylights, exterior doors, and any metal roof with appropriate pigmented coatings, or any asphalt roof with appropriate pigmented coatings or cooling granules in 2009 only (Code Sec. 25C(c)(2)). Until the guidance is released, homeowners generally may continue to rely on manufacturers’ certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards. Planning point Although your clients have used the $500 lifetime maximum credit in 2007, they are still eligible to make additional qualifying property expenditures in 2009 and/or 2010 and be eligible for a residential energy property credit of up to $1,500 over both years. All credit limitations applicable to specific property, such as the $200 maximum credit for window expenditures and the $150 maximum credit for furnaces, have been removed for qualifying expenditures in 2009 and 2010. Prior to your clients making expenditures and filing a tax return, you should consult a qualified tax adviser to ensure that you make the most of all the changes in the ARRA.