The Energy Tax Credit allows you to claim a credit on your taxes if you purchase energy-efficient appliances or make improvements to your home that reduces energy use, such as adding insulation. However, you must follow the Energy Tax Credit rules to the letter in order to be eligible for this valuable tax credit. The IRS is cracking down on people who claim the credit but did not comply by the stated rules.
Many Americans are choosing to make energy-saving improvements. They are buying electric or hybrid cars or investing in energy-efficient light bulbs and home appliances. This energy reduction effort has helped significantly decrease energy use; America's residential power consumption is now as low as it was in 2001.
However, just because you have made energy improvements to your home does not mean that you are eligible for the Energy Tax Credit. If you claim the credit without fulfilling the eligibility requirement, the IRS may audit your taxes and require you pay back the credit you claimed.
There are two federal tax credits that taxpayers can claim: the Residential Renewal Energy Tax Credit and the Residential Energy Efficiency Tax Credit. There are also additional tax credits available on a state-by-state basis.
Each of these tax credits comes with specific requirements. Some appliances, such as central air conditioners or electric heat pumps, must meet the Consortium for Energy Efficiency's highest efficiency tier. If you choose an appliance in a lower tier, you cannot claim the Energy Tax Credit.
Because of this, the IRS is taking steps to catch people who claim the tax credit without following the rules. Even if you made an honest mistake, you still run the risk of an expensive and time-consuming audit. The IRS has numerous systems in place to flag tax returns that appear to include mistakes or misreporting of income and credits, and it does not hesitate to audit returns that get flagged.
The best way to ensure the IRS does not question your use of this tax credit is to go over your taxes with a qualified CPA or tax professional before submitting them to the IRS. Bring all information and receipts relating to your energy purchases as well as any documentation about the home renovations you have completed.
If you anticipate buying new energy-efficient appliances or making home improvements, read the tax credit rules before getting started. That way, you ensure that your plans qualify for an energy credit, and you can legally claim the credit on your federal or state taxes.
The Energy Tax Credit is a great way to improve your home's energy efficiency and earn a credit to use on your income tax. The IRS is cracking down on misuse of the tax credit, so make sure your claim fulfills all of the stated guidelines before submitting it to the IRS.
(Photo courtesy of ponsulak / freedigitalphotos.net)