THE NEW AND IMPROVED ENERGY EFFICIENT HOME IMPROVEMENT CREDIT

 

The Inflation Reduction Act of 2022 brought back the credit for energy-efficient purchases for and improvements to a personal residence, which had expired on December 31, 2021, renamed it the Energy Efficient Home Improvement Credit, and enhanced and increased the credit for tax years 2023 through 2032.

For tax years 2023 through 2032 –

* The credit is increased to 30% of eligible costs, which includes the cost of installation.

* The annual limit is increased to $1,200 (with some exceptions discussed below).  There is NO lifetime limit.

* A credit of up to $150 is allowed for a home energy study or audit.

* The annual per item maximum credit limits are:

·         $250 for an exterior door ($500 for more than one door),

·         $600 for exterior windows and skylights, central air conditioners, electric panels and related equipment, natural gas, propane, or oil water heaters, and natural gas, propane or oil furnaces or hot water boilers, and

·         $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (here the full $2,000 credit is allowed despite the $1,200 annual limit).
 
* A credit can be claimed for qualifying purchases for and improvements to a second personal residence, such as a vacation home.
 
* Beginning with 2025 returns it appears the manufacturer of an item that qualifies for the credit by meeting the specific energy star requirements must create a “product identification number” for the item and this number must be entered on the claimant’s tax return in order to get the applicable credit. 
 
If you use a tax professional to prepare your returns be aware - you are responsible for determining if your purchase meets all the requirements and qualifies for a tax credit – do not expect your tax pro to do it for you.
 
You can find the specific qualifications for individual items for 2023 and beyond at www.energystar.gov/about/federal_tax_credits/non_business_energy_property_tax_credits.   
 
TTFN

THE NEW AND IMPROVED ENERGY EFFICIENT HOME IMPROVEMENT CREDIT

The Inflation Reduction Act of 2022 brought back the credit for energy-efficient purchases for and improvements to a personal residence, which had expired on December 31, 2021, renamed it the Energy Efficient Home Improvement Credit, and enhanced and increased the credit for tax years 2023 through 2032.
 
Based on summaries and analyses of the Act that I have read here is the word on the improved credit.
 
For 2022 returns filed in 2023 the credit remains the same as it was for 2021 returns.  The 10% credit, with a lifetime $500 limit, applies to qualified purchases for –
 
* Heating, Ventilating, and Air Conditioning: advanced main air circulating fan ($50 maximum), air source heat pumps, central air conditioning ($300 maximum), gas, propane, or oil hot water boiler ($150 maximum), and natural gas, propane or oil furnace ($300 maximum),
* Water Heaters: gas, propane or oil water heater, and electric heat pump water heater ($300 max),
* Insulation,
* Roofing (metal and asphalt), and
* Windows and Doors ($200 lifetime limit for windows and skylights)
 
For tax years 2023 through 2032 –
 
* The credit is increased to 30% of eligible costs, which includes the cost of installation.
 
* The annual limit is increased to $1,200 (with some exceptions discussed below).  There is NO lifetime limit.
 
* A credit of up to $150 is allowed for a home energy study or audit.
 
* The annual per item maximum credit limits are:
 
·         $250 for an exterior door ($500 for more than one door),
·         $600 for exterior windows and skylights, central air conditioners, electric panels and related equipment, natural gas, propane, or oil water heaters, and natural gas, propane or oil furnaces or hot water boilers, and
·         $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (here the full $2,000 credit is allowed despite the $1,200 annual limit).
 
* A credit can be claimed for qualifying purchases for and improvements to a second personal residence, such as a vacation home.
 
I did read that there may also be rebates available.  More on that in the future when I find more detailed information.
 
From the point of view of the tax preparer perhaps the best change to the credit in the Act is that beginning with 2025 returns it appears the manufacturer of an item that qualifies for the credit by meeting the specific energy star requirements must create a “product identification number” for the item and this number must be entered on the claimant’s tax return in order to get the applicable credit. 
 
In the past taxpayers would merely tell their tax preparer they bought a new furnace or heater and expect the preparer to know by magic that the individual product qualified for the credit.  I told my clients that they must determine if their purchase qualified – I would not do it for them. 
 
FYI, you can find the specific qualifications for individual items for 2022 and beyond here.
 
TTFN

THE SECOND ECONOMIC STIMULUS PACKAGE

 

“The Consolidated Appropriations Act of 2021” was finally signed into law by Trump on Sunday night, December 27.  In addition to the $600 per taxpayer and dependent child Economic Impact Payment (discussed here), the Act includes the following items that affect Form 1040 (and 1040-SR) filers -

FOR 2020 RETURNS

Taxpayers can use their 2019 income to determine eligibility for and calculate the 2020 Earned Income Credit and Additional Child Tax Credit if it results in a bigger credit than actual 2020 income.

FOR 2021 AND BEYOND RETURNS

* Business-related “food or beverages provided by a restaurant” are 100% deductible for 2021 and 2022 (remember - employee business expenses, including employee-paid business meals, are no longer deductible on Schedule A).   

* The "above-the-line" deduction of up to $300 per taxpayer for qualifying charitable contributions for taxpayers who do not itemize on Schedule A, a per return deduction for 2020, is per taxpayer for 2021.  The maximum deduction for a married couple filing a joint 2021 return is $600.

* The 7½% of AGI exclusion for medical expenses on Schedule A is made permanent

* The MAGI-based phase-out amounts for the Lifetime Learning Credit are permanently increased to equal the amounts for the American Opportunity Credit.

* The lifetime $500 credit for 10% of qualified residential energy purchases is extended for 2021.

The Act also included new and extended business and payroll tax relief and other non-1040 items.

TTFN

LAST CHANGE FOR A RESIDENTIAL ENERGY CREDIT

 

One of the famous, or perhaps infamous, tax "exenders" that will expire on December 31, 2020 is the $500 lifetime credit for energy-efficient purchases for your primary home.

If you purchased any of the following items in 2020 for your primary personal residence, you may be able to claim the energy credit –

* Air Source Heat Pump

* Central Air Conditioning

* Gas, Propane, or Oil Hot Water Boiler

* Gas, Propane or Oil Furnaces and Fans

* Water Heaters (non-solar)

* Advanced Main Air Circulating Fan

* Biomass Stoves

* Insulation

* Roofs (Metal & Asphalt)

* Windows, Doors & Skylights

Be sure to save and give to your tax pro a copy of the invoice, any energy efficiency statements, and any Manufacturer’s Certification statement or other documentation that the purchase qualifies for the credit.  It is your responsibility to determine if the purchase qualifies – and NOT your tax preparer’s – and your responsibility to maintain proof in case the credit is questioned by the IRS.

Remember the lifetime $500 maximum.  If you claimed an energy credit for any of the above purchases in 2006, 2007, or 2009 through 2019 your 2020 credit will be reduced or eliminated.

You can find information on exactly what purchases will qualify for the credit here.

TTFN

 

 

 

TAX CREDITS FOR SOLAR ENERGY

I recently received an email from a client who is “thinking about putting solar on the house”.

 

He asked whether he should purchase or lease the product, about the interest on a loan to purchase the product, and in general if it was a good idea.

 

Here is my response -

 

I have no personal knowledge of or experience with any solar energy product.  Here is what I know -

 

(1) You can claim a tax credit on IRS Form 5695 for 30% of the cost of solar energy systems (solar electric property and solar water heating property), including the cost of installation, purchased for a person's personal residence.

 

(2) No credit is allowed for equipment to heat swimming pools or hot tubs.

 

(3) The actual credit allowed is limited by one's tax liability.  If the amount of the credit is more than the actual tax you owe for the year the unused portion of the credit can be carried forward to be used in future years.

 

(4) The credit is allowed against the dreaded AMT.

 

(5) You are eligible for the credit as long as you own your solar energy system, rather than lease it. If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system.

 

As far as a deduction for interest - you are only allowed to deduct mortgage interest.  If you took out a mortgage loan (must be secured by your residence) to pay for the system you can deduct the interest on Schedule A.  The interest would be deducted over the term of the loan as you make payments, like any other mortgage loan.

 

Whether purchasing a system is a good idea financially - take the cost of the system less the 30% federal tax credit and compare that to the anticipated annual utility cost savings over time.  You should also factor in how the purchase will increase the market value of your home.  You should consult a real estate professional not connected to the product in any way to see how installing such a product will increase the market value of your home.

 

Here is a link to more information on solar energy systems from EnergyStar -

 

Federal Tax Credits: Solar Energy Systems
 

And here are links to more information on claiming the credit -

 

How Do I Claim the Solar Tax Credit | EnergySage 

 

Homeowner's Guide to the Federal Investment Tax Credit for Solar PV

 

So do you have any questions?

 

TTFN

 

 

 

 

 

 

 

RESIDENTIAL ENERGY CREDIT STILL AVAILABLE FOR 2016

 

While the PATH Act (The Protecting Americans from Tax Hikes Act of 2015) made many of the popular “tax extenders” permanent, the following items were extended through December 31, 2016 only.  They will no longer be available on 2017 and beyond returns.  So 2016 is the last chance you have to claim a deduction -

1. Exclusion of up to $2 Million of Cancellation of Debt (COD) Income from Foreclosure of Principal Personal Residence. 

2. Deduction for Tuition and Fees – the above-the-line deduction of $4,000 or $2,000 of qualified tuition and fees for both undergraduate and graduate education.

3. Itemized Deduction for Mortgage Insurance Premiums 

4. Lifetime Maximum $500 Residential Energy Credit of 10% on Qualified Energy Efficient Purchases and Improvements.

For the Residential Energy Credit you have until December 31^st to make a purchase that qualifies for the benefit.

This energy credit has a $500 lifetime maximum.  If you claimed over $500 in energy tax credits from 2006 - 2015 you are not eligible for a credit for 2016, so an additional energy efficient purchase will not provide any federal tax benefit.

The credit is available for -

* Biomass Stoves

* Heating Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

* Insulation

* Roofs (Metal and Asphalt)

* Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)

* Windows, Doors, and Skylights

There are specific dollar limitations and “proficiency” requirements for each of the above items.  For example the lifetime deduction for qualified windows, doors, and skylights is $200.  And you cannot just purchase new windows for your home - the windows must be “ENERGY STAR certified”.   Gas, propane, or oil water heaters must have be “recognized as ENERGY STAR Most Efficient 2016” and have an AFUE >= 95.

You can go online to a special section of the Energy Star website to find out what the specific qualifications are for individual items.

Make sure your purchase qualifies for the credit – do not expect your tax preparer to waste his or her valuable time during the filing season investigating your purchase.  When giving the purchase information to your tax pro also include any Manufacturer’s Certification statement or other documentation, or your affirmation that you have checked carefully and found that the purchase definitely qualifies for the credit.  

TTFN

 

 

 

 

THE PATH ACT OF 2015 AND TAX PLANNING FOR 2016

Now that the “tax extenders” have been extended, many of them permanently, via the PATH ACT OF 2015, here are some of these benefits that you should keep in mind from a tax planning point of view during tax year 2016.

STATE AND LOCAL SALES TAX (PERMANENT) -

You can elect to deduct state and local sales tax paid instead of deducting state and local income tax paid. If you deduct state and local income tax on Schedule A you cannot also deduct state and local sales tax, and vice versa. 

For this purpose state and local income tax includes the deductible unemployment (SUI), disability (SDI), and/or family leave (FLI) contributions withheld in certain states.  If you elect to deduct sales tax you cannot also deduct state unemployment, disability, and/or family leave taxes.

You have two options for claiming a sales tax deduction – the actual amount paid for the year, per receipts, or the amount taken from the IRS-generated Optional State Sales Tax Tables, with an additional amount allowed if you also pay local sales tax, plus the tax paid on the purchase of “big-ticket” items such as a car, motorcycle, truck, van, recreational vehicle, sport utility vehicle, off-road vehicle, boat, airplane, motor home, home, and home building materials, and any sales tax paid on the lease of a motor vehicle.

The amount you can deduct if you use the IRS tables is based on your “total available income”, your state of residence, and the number of exemptions you claim. Your “total available income” includes your Adjusted Gross Income plus any nontaxable receipts, such as –

·      tax-exempt interest,

·      Veteran’s benefits,

·      nontaxable combat pay,

·      Workers’ Compensation benefits,

·      the non-taxable portion of Social Security and Railroad benefits,

·      the non-taxable portion of IRA, pension or annuity distributions (not amounts that are “rolled-over”), and

·      public assistance payments.

If a couple files separately, and both spouses elect to deduct state and local sales tax, and one spouse elects to use the sales tax tables instead of actual sales tax paid, the other spouse must also use the tables to determine the state and local sales tax deduction on his/her separate Schedule A.

You should keep track of all of the sales tax you pay during the year by saving, in a small box or a manila envelope, all purchase receipts that indicate an amount of sales tax paid.  In January of next year add up all of the sales tax amounts on these receipts and see if the total exceeds both the amount of state income tax, if any, that you can deduct and the sales tax deduction allowed from the IRS-generated Optional State Sales Tax Tables.

You may want to do a preliminary comparison as part of your year-end tax planning in November.  If you have enough in sales tax to provide a better tax benefit, or are “close to the edge”, and you were planning to purchase a new car or other big item(s) early in the New Year, considering making the purchase at the end of December to get the increased tax deduction for 2016.

When doing your comparisons keep in mind if you deduct the total amount of state income tax withheld on Schedule A for 2016 you may have to claim any refund received as taxable income on your 2017 tax return.

QUALIFIED CHARITABLE DISTRIBUTION (PERMANENT) -

A Qualified Charitable Distribution (QCD) allows IRA owners age 70½ and older to directly transfer up to $100,000 from an IRA account to a qualified charity, tax-free, as part (or all) of their Required Minimum Distribution (RMD) for the year.

Any portion of an RMD that represents a QCD is not included in gross taxable income reported on Line 15(b) “Taxable amount” of “IRA distributions”) on Page 1 of Form 1040.  If your total Required Minimum Distribution from your IRA investments for the year is $50,000, and you have made a QCD of $40,000, you only report $10,000 as a taxable distribution.  If the entire $50,000 was used as a QCD you have “0” taxable income to report.

By reducing the amount of the RMD that must be included in gross income you also reduce your Adjusted Gross Income (AGI), and, by doing so, you can also potentially reduce the taxable portion of Social Security or Railroad Retirement benefits and increase the multitude of deductions and credits that are reduced or phased out as AGI rises. 

You are not allowed to claim a charitable deduction for the amount of the QCD on Schedule A – the “deduction” has already been claimed by reducing the taxable portion of your RMD. 

RESIDENTIAL ENERGY TAX CREDIT (FOR 2016 ONLY) -

The credit allowed is 10% of the cost of qualifying energy-efficient purchases and improvements, up to a lifetime maximum of $500.  Some items are limited to a credit from $50 to $300.  The qualifying purchase or improvement must be for an existing home that is your principal residence.

If you claimed at least $500 in energy tax credits on your 2006 through 2015 returns, you are not eligible for a credit for 2016. If you claimed $300 in energy credits over the years, the most you can claim in 2016 is $200.

The credit is available for –

• Biomass Stoves

• Heating, Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

• Insulation

• Roofs (Metal and Asphalt)

• Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)

 

• Windows and Doors

The individual limitations on the credit for specific items are -

·   $50 for an advanced main air circulating fan,

·   $150 for a qualified natural gas, propane, or oil furnace or hot water boiler, 

·   $300 for an item of energy efficient building property, and

·   $200 lifetime limit for windows.

Not every new window, door, boiler, heater, or furnace will qualify. There are very specific "energy efficiency" requirements for each of the qualifying items. You can go to the Energy Star website to find out what the specific qualifications are for individual items.  

When giving your tax pro your “stuff” next February or March do not just include a copy of the bill for one of the listed items, or a note that you spent $800 for a new hot water heater, and expect him/her to waste his/her valuable time attempting to determine if the purchase qualifies for the credit. Do the homework and determine if your purchase qualifies before contacting your tax pro.  When you purchase any of the listed items ask the person selling it for a “Manufacturer’s Certification Statement” - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

My standard final word of advice – before acting on anything you have read here contact your tax professional.

TTFN

THE RESIDENTIAL ENERGY CREDIT IS BACK FOR 2012 (AND 2013)!

The American Taxpayer Relief Act extended the “Nonbusiness Energy Property Credit” for qualified energy efficiency improvements or residential energy property costs for your primary principal residence, which had expired on December 31, 2011, through 2013, making it retroactive to January 1, 2012.  

 

The credit is 10% of the qualified cost up to a maximum of $500. Some items are limited to a credit of from $50 - $300.  

The $500 is a “lifetime” limit. If you claimed over $500 in energy tax credits from 2006 - 2011 you are not eligible for a credit for 2012.

The credit is available for –

* Biomass Stoves

* Heating Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

* Insulation

* Roofs (Metal and Asphalt)

* Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)

* Windows and Doors

There are very specific “energy efficiency” requirements for each of the above items.  Not every new window, door, boiler, furnace, or roofing improvement will qualify.  You can go to the Energy Star website to find out what the specific qualifications are for individual items.

 

You may have to wait a few days before the above referenced Energy Star website has been updated for the new extension.  When I checked the site I found the following message - “Updates to information regarding recent tax credit changes are in process and will be posted here within the next 7 business days.”

When giving your tax pro your “stuff” next February or March do not just include a copy of the bill for one of the listed items, or a note that you spent $800 for a new hot water heater, and expect him/her to waste his/her valuable time attempting to determine if the purchase qualifies for the credit. Do the homework and determine if your purchase qualifies before contacting your tax pro. 

TTFN

MORE FINE WHINE!

(1) The biggest time waster during this past tax season was spending time staring at a frozen computer screen. My GDMFPOS computer was FSAM on occasion – wasting valuable time. As you know I do not use tax preparation software to prepare federal returns, but I do submit NJ returns online when possible and use the computer extensively during the season for research and word processing.

The second biggest time waster was trying to determine whether purchases of new windows, doors, water heaters, boilers and furnaces by clients qualified for an energy credit (is seems more so for 2010 returns than for 2009 returns).

While I instructed my clients to send me the Manufacturer’s Certification for all energy-efficient purchases, which verifies qualification for the credit, few actually did. For the most part I was given a copy of a bill or receipt for a potential energy-efficient item, or a note stating “I purchased a new hot water heater for $800.00”.

I then had to email the client and ask if they had a Manufacturer’s Certification, and, if not, explain the specific qualifications and ask if the item met these qualifications (a certain statutory minimum measure of energy efficiency), When the reply said they did not have a Certification and they did not know if the item met the specifications I would then have to ask for the make and model number of the product and, upon receipt, search through online listings to see if I could find a match.

This will not happen during next year’s tax season, when a limited energy credit is still available (as I discussed yesterday). If I am told “I bought a new hot water heater for $800.00” I will reply “Isn’t that special”.

If clients want to claim an energy credit on their 2011 federal return they will have to either send me a Manufacturer’s Certification Statement or verify by some other method that the item qualifies for the credit.

As I suggested in yesterday’s post, if a client has purchased what he/she thinks may qualify for the credit, but was not given a Manufacturer’s Certification Statement at the point of purchase, they should, before sending me their stuff, go back to the salesman and ask for one, or go the website of the item’s manufacturer and download a statement.

Clients can also go to the Energy Star website to find out what the specific qualifications are for individual items and compare these specifications to those identified in any manuals or paperwork received with the item. Those who do not have easy access to a computer can email me during 2011 and I will provide them with the required specifications.

I will not waste any of my time during the tax season trying to determine if the item qualifies.

Here is another great example of a tax credit that, while the main purpose of which is legitimate, has no business being in the Tax Code and only increases a tax preparer’s workload.

The credit for qualifying energy-efficient products should be given as a direct discount at the point of purchase – much like the Cash for Clunkers program of a few years back.

(2) While I provide most clients a Medical Expense Worksheet in my annual January mailing, telling them to fill it out themselves, I still receive from some a pile of medical bills, receipts and statements, as I did from one whose GD extension I just completed.

I tell clients not to send me their medical bills – and try to discourage them by saying I will charge $50.00 per hour for my time to sort through these bills – but some still do not listen.

Much of what I receive, as was the case with this client, is Blue Cross+Blue Shield, Medicare, or other insurance statements. For my purposes these statements are like tits on a bull – totally useless. They tell what the insurance provider has paid, but not what the client has actually paid during the year. What they often say is “you may be asked to pay” a certain amount – the amount not covered by insurance – but this is not always the case. Many medical providers will accept as payment in full what is given to them by the insurance company.

Next tax season if I receive a pile of medical bills, receipts and statements from a client I will promptly mail the pile back with another copy of my Medical Expense Worksheet.

Thank you for letting me vent!

TTFN

JUST ONE MORE THING

In addition to the limited energy credit I discussed this morning you should know that there is another energy credit that continues unchanged.

This credit is 30% of the cost of the qualifying energy-efficient property - with no upper limit. If the cost of the property is $25,000 you get a credit of $7,500! I claimed this credit for the first time on a GD extension I completed over the holiday week-end – getting my clients over $8000.

The credit, which does not expire until December 31, 2016, applies to the purchase of -

* Geothermal heat pumps

* Small Wind Turbines (residential)

* Solar Energy Systems

Both existing homes & new construction qualify. And the purchase can be for your principal residence or a personal use second home. The credit does not apply to rental property.

THE 2011 ENERGY CREDIT

While the 30% up to $1,500 residential energy credit expired on December 31, 2010, there is a reduced energy credit available for qualifying purchases made in 2011. The credit is 10% of the cost up to a maximum of $500. Some items are limited to a credit of from $50 - $300. The qualifying purchase must be for an existing home that is your principal residence.

The $500 is a “lifetime” limit. If you claimed over $500 in energy tax credits from 2006 - 2010 you are not eligible for a credit for 2011.

The credit is available for -

* Biomass Stoves

* Heating Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

* Insulation

* Roofs (Metal and Asphalt)

* Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)

* Windows and Doors

When you purchase any of the listed items ask the salesperson for a Manufacturer’s Certification Statement - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

If you have already purchased an item that you think may qualify but do not have a Manufacturer’s Certification Statement go back to the salesman and ask one. You can also go to the website of the item’s manufacturer and download a Certification Statement.

You can go to the Energy Star website to find out what the specific qualifications are for individual items.

You are not required to attach a copy of the Manufacturer’s Certification Statement to your tax return – but you need to keep one “on file” with your 2011 documentation in case you are questioned. And you will need to give a copy of the Certification Statement to your tax preparer at tax time to verify that your purchase qualifies for the credit.

When giving your tax pro your “stuff” next February or March do not just include a copy of the bill for one of the above items, or a note that you spent $800 for a new hot water heater, and expect him/her to waste his/her valuable time attempting to determine if the purchase qualifies for the credit. You must verify that the purchase qualifies if you want him/her to claim a credit!

TTFN

MORE PROBLEMS WITH TAX CREDITS

A “tweet” from NATP led me to “IRS Can’t Tell Who Deserves Energy Tax Credits” by Michael Cohn at ACCOUNTING TODAY.

According to the item -

“The Internal Revenue Service cannot determine whether taxpayers claiming Residential Energy Credits are actually entitled to them, according to a new government report {from the Treasury Inspector General for Tax Administration, aka TIGTA – rdf} that found the tax credits going to hundreds of prisoners and minors.”

Why? Because “the IRS does not require individuals to provide any third-party documentation to support the purchase of qualifying home improvement products and/or costs associated with making energy efficiency improvements and whether these qualified improvements were made to their principal residences.” Not so much that the IRS does not require documentation – Congress did not require it as part of the legislation creating the credit.

Michael tells us that -

“More than 6.8 million individuals claimed more than $5.8 billion in Residential Energy Credits on tax year 2009 tax returns processed through December 31, 2010.”

In a “statistically valid” random sampling of returns claiming the credit TIGTA “identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in Residential Energy Credits on their tax returns. These individuals, including 262 prisoners and 100 individuals under the age of 18, were allowed to erroneously claim these credits because the IRS did not develop a process to identify prisoners or individuals who are too young to buy a home. The IRS has data that could have been used to identify these erroneous credits.”

The problems sound similar to those encountered with the First-Time Homebuyer Credit before Congress required back-up documentation be submitted with the claim. In fact the problems discussed in the TIGTA report are common to most tax credits, and, for that matter, tax deductions. Applying for these benefits is as easy as entering a number on your 1040 – there are no checks and balances.

The only check and balance is the integrity of a tax professional if the return is done by a paid preparer. This puts an added burden on tax preparers, who must not only gather information from the client and put it on the return properly, but must also determine if an individual is entitled to a government welfare or other benefit.

In a recent post at DON’T MESS WITH TAXES Kay Bell, the Yellow Rose of Taxes, reminds us - “There are many, many tax expenditures -- losses to the U.S. Treasury from certain tax deductions, exemptions or credits -- that account each year for an estimated $1.1 trillion in forgone government money.” Discussions on, and proposals for, tax reform have concentrated on eliminating many, or most, of these “tax expenditures” from the Code.

However, the initial purposes behind these various tax expenditures that overpopulate our current tax system are not necessarily bad. What is bad is the use of the Tax Code to distribute these benefits.

There is nothing wrong with the basic concept of “rewarding” or “assisting” low income individuals for working – the Earned Income Credit. It is “more better” to have an individual with a family work at a lower paying job then to sit home on their arses and continue to partake of the public trough.

Continuing education, beyond the basic K-12, be it in college or a trade school, should be encouraged – the various education tax benefits. The more educated the populace the better decisions they will be able to make socially and politically (or so we assume) and the more money they will be able to earn, and put back into the economy.

The purchase of energy efficient equipment and materials helps to save the environment. But if only certain equipment and materials, with specified energy efficiencies, are encouraged it is more effective to have a direct “grant” or “discount” applied to the purchase of qualified equipment and materials at the point of purchase, when the specific efficiencies are easily determinable based on model number, then to require a tax professional to waste valuable time pouring though government regulations and product lists to determine if an item qualifies when the client/taxpayer has not received or saved a “Manufacturer’s Certificate”, and in the end give up and claim the credit just in case it qualifies and leave its verification to the possibility of an audit.

If the Tax Code were to be “cleansed” of offending tax expenditures it does not mean that the government will automatically put an additional $1.1 Trillion in the bank. It just means that a lot more individuals will pay their share of federal income tax, and yet many will at the same time continue to receive government subsidies or benefits for specific “encouraged” activities. But the benefits will be distributed through the proper channels as student financial aid, Aid to Families with Dependent Children, upfront discounts for energy-saving purchases, etc.

The benefits that had previously been distributed via the Tax Code will be distributed directly to beneficiaries or providers out of the budgets of the appropriate departments, with the appropriate safeguards and required documentation - as they should be.

Having a benefit directly distributed via the appropriate government agency (other than the IRS) is “more better” for the beneficiary – it is better to get a subsidy up-front than to have to pay the money out of pocket yourself and wait a year or two to get the money back via a tax refund. If a student qualifies for a $2,500 tuition and fee “subsidy” it is better to have the money paid directly to the school by the government, and reduce the need to borrow.

And having a benefit provided at the “point of purchase” allows the appropriate government agency to more adequately and properly verify that the “purchase”, and the purchaser, does indeed qualify for the benefit – so it is also “more better” for the government.

The Cash for Clunkers program proved that government benefits to encourage desired behavior could be successfully distributed through the “proper” channels – channels other than the Tax Code - and with a lot less fraud (this is my perception/assumption – I have not done extensive research on the program).

TTFN

IT' AIN'T NECESSARILY SO!

As I was driving down to Neptune to do my laundry this morning a deceptive commercial for storm windows played on the radio.

The ad basically said if you run into the sponsor’s store and buy storm windows before the end of the year the government will give you $1,500.

As Ira Gershwin wrote, It Ain't Necessarily So!

Yes, you can claim an energy tax credit of $1,500 for qualified purchases on your 2010 Form 1040. And yes, this includes storm windows.

However the credit is actually 30% of the total of your qualified purchases, up to a maximum of $1,500. So if you run down and buy $1,000 worth of storm windows the most you will get from Uncle Sam is $300. You must spend $5,000 in order to get the full $1,500.

And not all storm windows qualify. The windows must meet certain U factor and SHGC requirements (don't ask me what this means). The manufacturer will know if “his” windows qualify and will be able to provide purchasers with a Manufacturer’s Certification if they do.

Be aware that installation costs for windows, as well as doors, insulation, and roof, are not eligible for the credit.

The $1,500 maximum applies to the two year period of the credit – tax years 2009 and 2010. So if you purchased a qualifying item in 2009 and have already claimed the full $1,500 you will get absolutely no tax credit for qualifying storm windows purchased in 2010. If you claimed a $1,000 energy credit on your 2009 Form 1040 the most you can get for 2010 is $500.

And you must have a net tax liability of at least $1,500 to get a tax benefit of $1,500 for qualifying energy credits. The credit is neither refundable (thank God) nor able to be carried forward.

Before you run down anywhere to buy anything that you think will provide you with an energy credit check your 2009 Form 1040 to see what, if anything, has already been claimed. Then I suggest you go to the “Federal Tax Credits for Consumer Energy Efficiency” page at www.energystar.gov.

This is a great resource. It provides the very specific requirements for eligibility of each individual item – i.e. Heating, Ventilating, Air Conditioning (HVAC), Insulation, Roofs (Metal and Asphalt), Water Heaters, Windows and Doors, etc. – as well as links to lists of specific manufacturers and products that qualify. Prior to making the a purchase, check out the specific requirements at the Energy Star web page and make sure what you are buying does qualify.

And if you do buy be sure to get the Manufacturer’s Certification.

This misleading ad is similar to one that tells you to donate your car to a specific charity and get a big tax deduction. Again – it ain’t necessarily so. For one thing, in order to claim a deduction for donating your car to charity you must be able to itemize. And, again, you must have an actual tax liability that can be reduced by an additional itemized deduction.

I have said and written many times, here and elsewhere, that the best tax advice I can give you is - DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER. Don’t listen to a broker, a banker, an insurance salesman, or your Uncle Charlie! Or a radio ad!

TTFN

BE SURE TO GET THE MANUFACTURER’S CERTIFICATION!

The energy credit for homeowners is back for 2009!

The following items purchased for your primary residence may qualify for the credit:

• Energy-efficient windows
• Skylights
• Central air conditioners
• Electric heat pumps
• Water heaters
• Exterior doors
• Insulation
• Natural gas, propane or oil furnaces
• Natural gas, propane or oil hot water boilers
• Biomass fuel stoves
• Main air circulating fans
• Pigmented metal roofs

When you purchase an item that qualifies for an energy credit the seller should provide you with a “manufacturer certification”.

I have told, and continue to tell, my clients to be sure to save this certification and to actually give it to me with their 2009 tax “stuff”.

A newsletter I sent out in May to discuss the provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) included the following - “Just as with the previous credit, you should get a ‘manufacturer’s certification’ when you purchase a qualifying item. Save this certification and give it to me with your tax ‘stuff’ next year.”

On the WHAT I NEED page of the website for my 1040 practice – www.taxproservicescorp.com – I include - “IF YOU PURCHASED AN ITEM ELIGIBLE FOR AN ENERGY CREDIT - I need to know the cost of the item and I need to see the ‘Manufacturer's Certification’ you received from the seller.”

IRS Notice 2009-53 states that for the most part – “. . . a taxpayer may rely on a manufacturer’s certification that a building envelope component is an eligible building envelope component or that energy property is qualified energy property”.

There is no doubt in my mind that if your 2009 return is one of the very few selected for audit, and you claimed an energy credit, the IRS will ask to see the manufacturer’s certification for the energy-efficient item(s) purchased.

You must make sure that the certification applies to the 2009 energy credit law, and not the old 2005 law. Certifications dated after February 18, 2009, must include a notation that the product meets the efficiency standards contained in ARRA (apparently different from the standards in the earlier law).

Under the prior law you could rely on an Energy Star Label rather then an actual manufacturer’s certification to determine if the purchase qualified for the credit. For property placed in service after February 17, 2009, and paid for before June 1, 2009, you can rely on the Energy Star Label only for exterior windows or skylights. Effective June 1st this alternative will end.

So you see that it is very important that you have a manufacturer’s certification for any purchase for which you wish to claim an energy credit. Those of you who will be running out during the last months of 2009 to purchase energy-efficient items in order to get the credit on your 2009 Form 1040 must be sure you get a certification from the seller - do not rely on a seller’s verbal confirmation only!

TTFN

THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 – WHAT’S NEW FOR 2009 – PART I

Now that the tax season is over I have had a chance to review the items in the American Recovery and Reinvestment Act of 2009, signed into law by BO on February 17th, that will affect 2009 and 2010 Form 1040s (and 1040As). I will discuss these items over the next few days.

This past tax season several clients included notes or receipts for energy saving purchases made in 2008 with their tax “stuff”, hoping to get an energy tax credit. Unfortunately the credit for energy saving items purchased for your personal residence expired on December 31, 2007, and was not renewed until January 1, 2009. There was no such energy credit available for 2008 purchases. I expect that several of these clients were upset when I pointed out their bad timing.

The reinstated credit, a provision of ARARA 2009, allows for a maximum total energy credit of $1,500 for 2009 and 2010. If you use the full $1,500 credit on your 2009 Form 1040 you cannot claim an additional credit for qualifying purchases made in 2010 – but if you have a $700 credit on your 2009 return you can still claim up to $800 on your 2010 return, assuming you make qualified purchases in 2010.

The limits that had been placed on specific individual items - such $200 for windows, $50 for an advanced main air circulating fan, $150 for a qualified natural gas, propane, or oil furnace or hot water boiler, and $300 for “energy-efficient building property” - were also eliminated. The new credit is now 30% (up from 10%) of the cost of the item – up to the $1,500 maximum.

If you claimed the energy credit in 2006 or 2007 and used up part or all of the $500 credit maximum that was previously allowed you do not have to worry. The earlier $500 cap does not apply towards the $1,500 for 2009 and 2010 – you start from “0” with a clean slate in 2009.

The following items, which meet federal energy-efficiency standards, qualify for the credit:

· Energy-efficient windows
· Skylights
· Central air conditioners
· Electric heat pumps
· Water heaters
· Exterior doors
· Insulation
· Natural gas, propane or oil furnaces
· Natural gas, propane or oil hot water boilers
· Biomass fuel stoves
· Main air circulating fans
· Pigmented metal roofs

Just as with the previous credit, you should receive a “manufacturer’s certification” when you purchase an item that qualified for the energy credit. Save this certification and give it to your tax professional with your “stuff” next year. And to repeat, only qualifying items purchased for use in your primary personal residence are eligible for the credit.

Click here for more detailed information on the items available for the revised reinstated energy tax credit.

TTFN