Stimulus package's tax credits reward home energy efficiency

— -- You know you live in a drafty house when your scented candles won't stop flickering, your natural gas bill is higher than your mortgage payment, and your sheepdog starts wearing a sweater.

You could raise your comfort level and lower your energy bills significantly by installing insulation, replacing leaky windows and doors, and replacing old furnaces and air conditioners with energy-efficient models.

But those projects cost money, and there's precious little of that around these days.

Still, if you can come up with the cash, you may be able to recoup some of your costs when you file your 2009 taxes. The economic stimulus package signed into law in February revived and expanded tax credits for energy-efficient home improvements that expired in 2007.

The bad news is that homeowners who installed new windows or insulation in 2008 are out of luck, at least as far as federal tax credits are concerned, says Matt Golden, president of Sustainable Spaces, a home retrofitting company based in San Francisco. The new tax credits don't apply to home improvements made last year.

Here's a look at what's available:

•A tax credit for 30% of the cost of energy-efficient doors and windows, insulation, air conditioners, furnaces, heat pumps and boilers, up to a lifetime cap of $1,500. This credit is available for 2009 and 2010.

That means if you spend $5,000 on new windows this year and claim a $1,500 tax credit on your 2009 tax return, you won't be able to claim an additional credit in 2010.

This is a more generous credit than the one that was available in 2006 and 2007, which covered 10% of the costs, up to a lifetime cap of $500, says Robin Christian, senior tax analyst for Thomson Reuters. The old credits also contained individual caps, such as a $200 limit on new windows. With the new credits, you can claim 30% of all your energy-efficient costs, up to the lifetime cap, she says.

For windows, doors, insulation and other similar projects that tighten up the "shell" of your home, the credit is limited to the cost of materials, Golden says.

However, if you buy a new air conditioner, furnace, heat pump or boiler that meets the energy-efficient guidelines, you can include the cost of installation in calculating the credit.

Only improvements to your primary residence qualify for the credits, says Edward Smith, tax partner with BDO Seidman in Boston. Unlike other tax credits, there are no income phaseouts, Smith says. In addition, taxpayers who are subject to the alternative minimum tax — a parallel tax system that often affects people who pay high property taxes — will be able to claim the credits, he says.

•Expanded tax credits for more ambitious projects, such as solar water heaters.

Starting in 2009, homeowners who install solar water heaters, geothermal heat pumps and wind energy systems are eligible for a tax credit of up to 30% of the cost, with no caps. Previously, caps on these types of projects ranged from $2,000 to $4,000. These tax credits are available through 2016, and both labor and materials qualify.

For more information about eligible energy-efficient home improvements, go to the website for the Alliance to Save Energy, www.ase.org.

Hybrid tax break

The economic stimulus package also contained a provision that could expand the number of taxpayers eligible for a tax break on hybrid vehicles.

Taxpayers who purchase an IRS-certified hybrid — a vehicle that combines an electric motor with a gas engine — are eligible for tax credits ranging from $250 to $3,000, depending on the type of vehicle.

In the past, though, taxpayers who were subject to the alternative minimum tax were ineligible for the hybrid tax credit. In addition, some taxpayers who were close to the threshold for the AMT saw the amount of their credit reduced.

However, a clause in the stimulus bill allows taxpayers who are subject to the AMT to claim the credit, starting this year, says Amy McAnarney, executive director of H&R Block's Tax Institute. The credit, which is scheduled to expire at the end of 2010, can't exceed your tax liability, she says.

Once a manufacturer has sold 60,000 hybrid vehicles, the credit phases out and gradually disappears. Toyota and Honda hybrids are no longer eligible for the tax credit. To find a list of hybrids that are still eligible, go to www.fueleconomy.gov.

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: sblock@usatoday.com.