Since the 1970s, the government has been encouraging Americans to conserve energy, and for good reason. Conserving energy can help reduce our country’s dependence on foreign oil, helps the environment and can save us money. As an incentive to conserve energy at home, the federal government offers tax credits to homeowners who purchase energy-saving improvements. The program is known as Energy Star.
The Energy Star program
The EPA and the Department of Energy have worked together on Energy Star since 1996, in order to promote home and business energy efficiency. According to Energy Star's website, the use of Energy Star approved products -- windows, heating and air-conditioning systems and insulation, for instance -- saved homeowners $17 billion in 2009, and avoided greenhouse gas emissions equivalent to 30 million cars.
Equipment that qualifies for energy tax credits
Residential geothermal heat pumps, wind turbines and solar-power systems installed before the end of 2016 also qualify for a separate 30 percent credit. You can claim this for new or existing buildings, and for your vacation home as well as your primary residence.
A tax credit is better than a tax deduction because you take the money directly off your taxes rather than off your taxable income.
Filing for energy tax credits on your tax return
To claim the credit, you'll need IRS Form 5695. Work out the credit amount on that form then enter it on your 1040. You should keep your receipt for the appliance as well as the Manufacturer's Certification Statement, so you can prove your claim if the IRS ever conducts an audit.
Just remember, you can reduce your taxes with the energy tax credit, but you can't get money back. In other words, if you owe $2,200 and your credit is $3,400, you can only claim $2,200 this year. However, with the credit involving turbines and heat pumps, the remaining $1,200 could be carried over to the following year.
When you use TurboTax to prepare your taxes, we'll ask simple questions to see which credits you can claim, and we'll fill in all the right forms for you.