8 Energy Efficient Upgrades That Can Lower Your Tax Bill

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February 10, 2017

Government tax credits may be available for homeowners who make efficiency upgrades to their properties. These improvements can help reduce the amount of carbon emissions that homes generate and release into the atmosphere while lowering the strain on the power grid. Such upgrades may have an extra benefit for homeowners: they can reduce monthly power bills. Ideally, the money saved on electricity can help finance efficiency projects over time. There are even special financing options, such PACE (Property Assessed Clean Energy) programs, which help property owners pay upfront for qualifying upgrades, and then pay them off over time as a line item on their property tax bill. In the short term, however, tax breaks for projects like installing Energy Star certified appliances, can provide an immediate boost and make tax day less daunting. As of December 2016, if you are eligible, the IRS offers a tax credit equal to 10% of the total cost of buying and installing Energy Star certified appliances (up to $500) and a solar investment tax credit (ITC), that may cover up to 30% of the system’s cost (with no cap) for existing homes and new construction. Here are eight energy-efficient upgrades that may lower your overall energy costs:

1. Geothermal Heat Pumps

Geothermal heat pumps harness the earth’s natural heat to warm a house. They also power air conditioners and provide hot water. The temperature 20 to 40 feet underground is always between 50 and 60 degrees, regardless of the weather above ground). Geothermal heat pumps take advantage of this constant temp by pumping underground air into the home where it only needs to be slightly heated or cooled. Beyond standard models, a homeowner can purchase Energy Star-certified geothermal pumps, which are nearly 50% more efficient than standard models. These appliances can lead to further savings. Is there a catch? Installation can be pricey because, in addition to hooking up the equipment, the installer must drill a hole in the ground. The good news is that federal and (often) state tax breaks may cover 30% (or more) of the project’s cost. And because these ground-source heat pumps are so efficient, homeowners can break even on their investment in a decade or less.

2. Solar Energy Systems

Thanks to the extension of the federal Investment Tax Credit (ITC), passed in December of 2015, solar energy systems may still qualify for a 30% reduction of the overall cost of the equipment and installation. In order to earn the highest percentage rebate, the solar panels must provide power to the home (not a swimming pool, for example). The ITC will not be around forever. The 30% tax credit will be in place through the end 2019. It is scheduled to drop to 26% in 2020, and 22% in 2021, before disappearing entirely for residential solar projects. Like all the energy-efficient upgrades in this article, solar power has the double benefit of qualifying for tax credits and lowering energy costs over the long-term. With a quality solar system and proper energy-use strategies, solar can cover a majority of (if not all) a home’s monthly electricity costs. Therefore, despite the high initial price, residential solar is certainly worth exploring.

3. Fuel Cells

Fuel cells work in a way that is very similar to batteries: they can provide power as long as they have fuel to use. In a hydrogen fuel cell, for example, a hydrogen-rich fuel such as clean natural gas or renewable biogas goes into the fuel cell stack. It then reacts with the oxygen or ambient air and produces only electricity, heat and water. Because fuel cells do not produce carbon, they qualify for tax credits. The technology for fuel cells has improved considerably in recent years, but it is still younger and more complicated than solar or wind power. Still, cells can be very flexible. According to the U.S. Department of Energy, the fuel cell credit is equal to 30% of expenditures (with no maximum credit), yet capped at $1,500 per 0.5 kilowatt (kW) of capacity. An eligible fuel cell property must have a minimum capacity of 0.5 kW with an electricity-only generation efficiency of 30% or greater.

4. Windows, Doors, Skylights

Minor projects, such as installing Energy Star certified windows or doors, could also earn tax credits. As of December 2016, these energy-saving windows and skylights can qualify for a 10% credit up to $200, and a door earns a 10% credit up to $500. These caps mean that property owners may be less enthusiastic about a window upgrade as they would about installing a geothermal heating system, but this kind of project still brings significant ongoing savings on energy costs. Thicker windows improve insulation and lower heating and cooling bills. The same benefit applies to new doors. Skylights can decrease lighting and heating costs by increasing natural light inside the home and supplying heat through solar gain. While smaller projects will not earn a major tax credit, even a modest amount may make it possible to afford higher-quality upgrades, which can generate energy savings.

5. Central Air Conditioning

The same equation applies to central air conditioners. Qualifying for a $300 tax break, Energy Star air conditioners save homeowners money on cooling in the long-run due to their higher efficiency. The credit from the government could put a more efficient air conditioner into the same price range as cheaper (but less efficient) options.

6. Solar Water Heating

Solar water heaters or domestic hot water systems use energy from the sun to heat water for a home. These systems are not the same as installing a solar electric (or photovoltaic) system to provide general electricity for the entire home. Domestic hot water systems can, however, lead to significant monthly savings, because water heating can account for as much as one-third of home energy costs. There are two types of solar water heating systems: active (these involve pumps and controls to circulate water through collectors and into your house) and passive systems. The government categorizes solar heating the same as solar electric power, geothermal heating, and wind energy. Homeowners can receive a 30% credit on their solar water heating upgrade – and more importantly, there is no cap on the amount of the tax credit.

7. Small Wind Energy

Small residential wind turbines supplement other power sources in a home, with the goal of lowering the monthly electricity bills. Installation costs are included in the tax credit. This is important because the wind power must be connected to the regular electrical system; a task that only a certified electrician will be able to accomplish.

8. Insulation

Especially in older homes, adding extra insulation is one of the best ways to lower energy costs. This project can bring up to $500 in tax credits. Like the other ideas in this article, this improvement can qualify for PACE financing. This innovative financing model enables property owners to finance energy efficiency, renewable energy, weatherization and water conservation projects over time. PACE stands for property assessed clean energy, so the debt is tied to the property, rather than the individual. This arrangement, therefore, enables a homeowner to pay for their upgrade over time – as a line item on their property taxes. In order to take advantage of the tax credits for energy-efficient upgrades, you must complete the project before the end of the year. Keep in mind that some tax breaks, such as those for wind power and solar power, are scheduled to be lowered in the coming years, such as the solar ITC mentioned above. So the earlier you can take advantage of these offers, the better.

Find out how PACE can help you finance your home upgrades today. Call YgreneWorks at (855) 901-3999 or email us: info@ygreneworks.com