Every once in a while we hear something from one of our clients that we just have to pass along to all of our newsletter readers. Thanks to the Energy Policy Act of 2005 (EPACT) and incentives offered by Maryland state and county governments, our clients, Mr. and Mrs. Greene, have leveraged tax breaks to “go green” without spending much green.
The story begins with the Greenes deciding that they wanted to reduce their use of fossil fuels. Their research uncovered the fact that EPACT offers some tax credits for the installation of solar-powered hot water heating equipment. Tax credits are more valuable than deductions because the credits are actual tax dollars saved; in other words, they are a one-for-one reduction in taxes due, rather than a reduction in your taxable income.
The Residential Energy Efficient Property Credit (as this one is known) equals 30% of the amount spent on one of the listed improvements. There is an overall limit of $2,000.
The Greenes purchased a solar hot water system and had it installed in their principal residence in Howard County. Including installation, the total cost was $5,450, so they obtained a tax break under EPACT of $1,635.
It gets better. The Greenes also found Maryland state and county incentives. Maryland has a Solar Energy Grant Program that offers a grant of 20% (maximum $2,000) to install qualified solar energy systems in homes and commercial buildings. Howard County provides a real estate tax credit of up to 50% of the cost of the equipment (not installation), up to a maximum of $5,000.
|Here’s a summary of the cost and returns:|
|Cost of solar-powered hot water system||$5,450|
|Federal tax credit (lesser of 30% x $5,450 or $2,000)||$1,635|
|Maryland grant (up to 20% x $5,400 or $2,000 max)||$1,090|
|Howard County Real Property Tax Credit (50% of cost or $1,500 max)||$1,500|
|Total Tax Savings and Incentives||$4,225|
|The actual cost to the Greenes for their solar-powered hot water system||$1,225|
As the table (above) shows, the Greenes used all three credits to reduce their cost of the solar-powered hot water system to less than a quarter of its price.
Given the growing cost of energy, the Greenes will likely recoup this cost in 2 years.
Practicalities and Limits
Can BWFA play a role in helping you take advantage of similar opportunities? You bet.
FIRST, we can review tax laws to determine if your purchase and installation of an alternative energy product qualifies for federal, state, and/or county tax breaks.
SECOND, we can determine if there are any special timing issues. For example, the EPACT tax break that the Greenes used will expire on Dec. 31, 2007.
THIRD, we can run the numbers under alternate scenarios, in order to ensure you don’t face any unpleasant surprises. For example, if the Greenes were in a situation where they were paying the Alternative Minimum Tax, then they could not have claimed the $2,000 federal income tax credit.
We encourage all of our clients to contact us when they are going to make a decision with a significant financial impact, especially one that potentially generates tax savings. We can help you understand the full financial impact, and in the case of the Greenes, ensure that you are getting the most for your investment.
Here are Web sites with information about green energy tax breaks.
www.energy.gov/taxbreaks — U.S. Department of Energy’s main site about energy-efficient incentives.
www.energy.gov/taxbreaks.htm — U.S. Department of Energy web page describing the federal tax credits available under the Energy Policy Act of 2005.
www.dsireusa.org — Database for many states’ incentives for renewables and efficiency.
www.energy.state.md.us/financial/residential.htm — Maryland’s site for energy-efficient programs.