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Tax Breaks

A Narrow Window of Opportunity

Install energy-efficient equipment and qualify for up to $500 in credits.

Uncle Sam can help insulate you from the high cost of heating and cooling your home. Homeowners who install energy-efficient doors and windows or make other energy-saving home improvements may snag up to $500 in income-tax credits. But don't delay. To take advantage of this tax break you must install the new equipment this year or next and claim the credit on your 2006 or 2007 return.

This new credit is more valuable than a deduction because it reduces your tax bill (or boosts your refund) dollar for dollar, rather than reducing the amount of your income that is taxable. And you can claim the credit regardless of your income level. The catch: Like most things associated with taxes, the devil is in the details.

Fine print

Homeowners may claim the credit only if they make improvements to their existing house, and only a portion of the cost of qualifying improvements may be applied. (Tax incentives for energy-efficient new homes and appliances are available to homebuilders and appliance manufacturers, which may pass along savings to consumers.)

Among the improvements covered are 10% of the cost of installing insulation, energy-efficient windows, doors, skylights and metal roofs coated with heat-reducing pigment. But only $200 of your $500 maximum credit over the two-year period can be allocated to replacement windows. Other items also have caps within the $500 limit, such as $50 for a main air-circulating fan, $150 to upgrade to a more efficient furnace or boiler, and up to $300 for a new heat pump or central air-conditioning system.


Although you can't claim your tax break until you file your 2006 return next year, you'll probably want to buy and install your equipment as soon as possible. That will trim this summer's air conditioning bills and next winter's heating bills, which could increase dramatically due to record-high prices for crude oil. The IRS says consumers can rely on manufacturers' assurances that their energy-efficient items will qualify for the tax credit.

Check, a Web site sponsored by the Alliance to Save Energy and other nonprofit organizations and government agencies, for the latest information on federal tax credits as well as any complementary incentives offered by some states and public utilities.

Here comes the sun. Solar energy also gets a nod from the feds. Homeowners can claim a 30% tax credit for the cost of buying and installing a solar-powered system for generating hot water or electricity. The maximum tax credit is $2,000 per year for each type of solar system. But the solar credit does not extend to heating your swimming pool or hot tub.