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Federal Incentives
Federal Energy
Energy Policy Act of 2005 federal tax credits
 
Signed by President Bush on August 8, 2005, the Energy Policy Act of 2005 (EPACT) offers consumers and federal businesses tax credits beginning in January 2006 for purchasing fuel-efficient hybrid-electric vehicles and energy-efficient appliances and products. Most of these federal tax credits remain in effect through 2007.
 
Buying and driving a fuel-efficient vehicle and purchasing and installing energy-efficient appliances and products provide many benefits such as better gas mileage – meaning lower gasoline costs, fewer emissions, lower energy bills, increased indoor comfort, and reduced air pollution.
 
Some consumers will also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient homes, vehicles and equipment. Each state’s energy office Web site may have more information on specific state tax information.
 
 
 
 

About the Federal Tax Credits
A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. Beginning in tax year 2006, consumers will be able to itemize purchases on their federal income tax form, which will lower the total amount of tax they owe the government.

Federal Automobile Tax Credits
Individuals and businesses who buy or lease a new hybrid gas-electric car or truck are eligible for, and can receive, a federal income tax credit of $250-$3,400 – depending on the fuel economy and the weight of the vehicle. Hybrid vehicles that use less gasoline than the average vehicle of similar weight and that meet an emissions standard qualify for the credit. "Lean-burn" diesel vehicles could also qualify, but currently available diesel vehicles do not meet the emissions standard. There is a similar credit for alternative-fuel vehicles and for fuel-cell vehicles.
 
If individuals and businesses buy more than one vehicle, they are eligible to receive a federal tax credit for each. If a tax-exempt organization buys such a vehicle, the retailer is also eligible to receive another credit. Companies that buy heavy-duty hybrid trucks are also eligible for a larger federal tax credit. Currently, there is a $2,000 federal tax deduction for hybrid vehicles for the remainder of 2005.
 
This federal tax credit is for vehicles "placed in service" beginning January 1, 2006, but because there is a waiting list for many hybrids, consumers can receive the federal tax credit if they arrange to purchase the vehicle this year as long as they do not take possession of the vehicle until January 1, 2006. This federal tax credit will be phased out for each manufacturer once that company has sold 60,000 eligible vehicles. At that point, the federal tax credit for each company’s vehicles will be gradually reduced over the course of another year.

Federal Home Energy Efficiency Improvement Tax Credits
Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in the home can receive a federal tax credit of up to $500 beginning in January 2006.
 
The EPACT also provides a federal tax credit equal to 30% of qualifying expenditures for purchase for qualified photovoltaic property and for solar water heating property used exclusively for purposes other than heating swimming pools and hot tubs. The federal tax credit shall not exceed $2000.
 
Improvements must be installed in or on the taxpayer’s principal residence in the United States. Home improvement federal tax credits apply for improvements made between January 1, 2006 and December 31, 2007.  To claim the credits, the taxpayer will need to complete and attach IRS Form 5695  to their federal return.

Federal Business Tax Credits
Businesses are eligible for federal tax credits for buying hybrid vehicles, for building energy- efficient buildings, and for improving the energy efficiency of commercial buildings (as outlined in the Energy Policy Act of 2005).
 

Federal Biodiesel/Alternative Fuels
 
Small producer biodiesel and ethanol credit. This federal credit will benefitsmall agri-biodiesel producers by giving them a 10 cent per gallon tax credit for up to 15 million gallons of agri-biodiesel produced. In addition, the limit on production capacity for small ethanol producers increased from 30 million to 60 million gallons. This is effective until the end of 2008.
 
Credit for installing alternative fuel refueling property. Fueling stations are eligible to claim a 30% federal credit for the cost of installing clean-fuel vehicle refueling equipment, (e.g. E85 ethanol pumping stations). Under the provision, a clean fuel is any fuel that consists of at least 85% ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen and any mixture of diesel fuel and biodiesel containing at least 20% biodiesel. This is effective through December 31, 2010.
 

Federal Buildings
 
Credit for business installation of qualified fuel cells, stationary microturbine power plants, and solar equipment. This provides a 30% federal tax credit for the purchase price for installing qualified fuel cell power plants for businesses, a 10% federal tax credit for qualifying stationary microturbine power plants and a 30% federal tax credit for qualifying solar energy equipment. This is effective January 1, 2006 through December 31, 2007.
 
Business credit of energy-efficient new homes. This provides federal tax credits to eligible contractors for the construction of a qualified new energy-efficient home. The federal tax credit applies to manufactured homes meeting Energy Star criteria and other homes, saving 50% of the energy compared to the EPACT standard. This is effective January 1, 2006 through December 31, 2007.
 
Energy-efficient Commercial building deduction. This provision allows a federal tax deduction for energy-efficient commercial buildings that reduce annual energy and power consumption by 50% compared to the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) 2001 standard. The federal tax deduction would equal the cost of energy-efficient property installed during construction, with a maximum deduction of $1.80 per square foot of the building. Additionally, a partial federal tax deduction of 60 cents per square foot would be provided for building subsystems.
 
Energy-efficient appliances - This provides a federal tax credit for the manufacturer of energy-efficient dishwashers, clothes washers, and refrigerators. The federal tax credits vary depending on the efficiency of the unit. This is effective for appliances manufactured in 2006 and 2007.
Below is a table of anticipated federal tax savings and energy savings for energy-efficient home improvements (as of November 2005):

Product Category
Product Type
Federal Tax Credit Specifications
Federal Tax Credit
Windows
Exterior Windows
Meet 2000 IECC & Amendments
10% of cost not to exceed $200 total
Skylights
Meet 2000 IECC & Amendments
10% of cost not to exceed $200 total
Exterior Doors
Meet 2000 IECC & Amendments
10% of cost not to exceed $500 total
Roofing
Metal Roofs
Energy Star qualified
10% of cost not to exceed $500 total
Insulation
Insulation
Meet 2000 IECC & Amendments
10% of cost not to exceed $500 total
HVAC
Central AC
EER 12.5/SEER 15 split Systems EER 12/SEER 14 package systems
$300
Air source heat pumps
HSPF 9 EER 13 SEER 15
$300
Geothermal heat pump
EER 14.1 COP 3.3 closed loop
EER 16.2 COP 3.6 open loop
EER 15 COP 3.5 direct expansion
$300
Gas, oil, propane water heater
Energy Factor 0.80
$300
Electric heat pump water heater
Energy Factor 2.0
$300
Gas, oil, propane furnace or hot water boiler
AFUE 95
$150
Advanced main air circulating fan
No more than 2% of furnace total energy use
$50
*Source: www.EnergyStar.gov
**The IRS will determine final federal tax credit amounts; however, federal tax credit forms are not yet available. As more information becomes available, it can be found at: http://www.energy.gov.