energy-tax-credits-3A few years ago, the government announced that taxpayers could spend money to install energy efficient systems and receive tax breaks. Those tax credits have been set to expire for some time, but Congress has renewed them for another year. In some cases, the tax credits have been renewed for even longer.

If you want to save money with energy efficient installations, this might be the year to do it. Tax credits have been renewed for tax year 2016, and are even retroactive to purchases made in 2015. That means that if you have been thinking about installing a system, now might be the time to do it. Even making smaller changes can mean tax credits.

Energy Efficiency Tax Credits 2016

If you add something to your existing home — and it’s your principal residence — you can claim a tax credit for 10% of the cost of some items, up to $500. There are some energy efficiency improvements you can make that offer a credit in a specific amount up to $3,000 as well. The items that qualify for this tax credit include:

  • Biomass stoves
  • Central air conditioning
  • Insulation
  • Air source heat pumps
  • Roofs
  • Non-solar water heaters
  • Energy efficiency windows, doors, and skylights

Other tax credits have been extended as well, and these don’t have upper limits. If you install fuel cells, you can take a credit for up to 30% of the cost of installation in your principal residence, whether it’s an existing home or new construction.

The tax credit for installing a renewable energy system in your home is not only extended through 2016, but all the way through December 31, 2019. It’s a tax credit worth 30% of the cost, with no upper limit. You can also see tax credits for 2020 and 2021, but they drop to 26% and 22% of cost, respectively. Geothermal heat pumps, small residential wind turbines, and solar energy systems all qualify.

Experts expect to see the solar market continue to grow as these tax credits remain in effect. If you have been thinking about it, check to see if there are also state tax breaks for energy efficiency upgrades, and consider whether or not you can get special financing, since these changes can be expensive.

Benefits of a Tax Credit

One of the great things about these energy efficiency tax credits is how valuable they can be on your taxes. With a deduction, you are reducing your taxable income. It can mean a lower tax amount, but it’s not as impactful as a tax credit.

A tax credit is a direct reduction in what you owe. It’s applied after your tax is figured. Your tax credit acts as a gift card that reduces what you have to pay. It’s a more powerful and effective way to reduce your tax bill than a deduction. While you still have to spend money to receive the credit, the fact that you get a portion of it back in a dollar-for-dollar tax reduction can be powerful. Plus, when you factor in your energy savings over time, you can see that the credit, combined with the savings, can be worth it.