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There are generally 2 types of home energy credits available for 2011: the nonbusiness energy property credit covers improved installation, such as energy-efficient insulation for heaters and air conditioners, and storm windows.
The residential energy efficient property credit covers investments in alternative sources of energy, such as solar, wind, geothermal, and fuel-cells. The calculation for the credits, with detailed instructions, is on Form 5695. Both credits are added together and listed on Form 1040.
Because the nonrefundable residential energy credits are the last credits listed in the Tax and Credits section of Form 1040, all credits listed earlier — such as the foreign tax credit, the credit for child and dependent care expenses, education tax credits, the retirement savings contributions credit, and the child tax credit – that are claimed by the taxpayer may reduce the amount of residential energy credits that can be claimed, since the total credits in this section cannot exceed the taxpayer's ordinary income tax liability. However, any unused amount credit can be carried forward to the next tax year.
The residential energy credits can be used offset both regular and AMT liability for 2011. However, beginning in 2012, residential energy credits can only offset regular tax liability that exceeds the tentative AMT, before the foreign tax credit is applied.
The nonbusiness energy property credit can only be used for improvements to a principal residence within the United States. Owners of cooperatives or condominiums can split the cost of installing the equipment with other unit owners.
The credit is equal to 10% of the cost of qualified improvements, with a total lifetime aggregate limit of $500. The maximum credit that could be claimed for 2009 and 2010 was $1,500, so if the taxpayer already claimed $500 of the credit in prior years, but after 2005, then he cannot claim the credit for 2011.
Specific limitations apply for specific improvements:
The nonbusiness energy property credit is only available for those improvements that are approved by the IRS. The improvements must meet energy efficiency standards approved by the IRS to qualify for the credit. Qualified energy efficiency improvements are any energy efficient building envelope component that satisfies the energy conservation criteria set by tax law. A building envelope component is any material or system designed to reduce heat loss or gain.
The taxpayer can rely on the manufacturers' written certification that its products qualify for the credit. The certification does not have to be attached to the tax return, but it should be retained by the taxpayer for his records.
The residential energy-efficient property credit can be claimed for up to 30% of the cost for qualified residential solar panels, solar water heating equipment, wind turbines, and geothermal heat pumps, including on-site preparation, assembly, and installation. However, heating equipment for a pool or hot tub does not qualify for the credit.
There is no dollar limit on the credit, and most residences qualify, even if it is not the taxpayer's principal residence.
There is also a qualified fuel-cell property credit that can also cover the cost of up to 30% of the fuel-cell, but it must be installed in a principal residence within the United States, and is subject to a limit based on kilowatt capacity. The fuel-cell must have at least one-half kilowatt of electricity capacity. The credit cannot exceed $500 for each half-kilowatt of electricity capacity.