2006 CCH Whole Ball of Tax
Do Good for the Planet, Do Well for Yourself
(RIVERWOODS, ILL., January 2006) – This year, you can help
save the environment and trim your taxes at the same time, according to CCH,
a Wolters Kluwer business and a leading provider of tax and accounting law
information, software and services (tax.cchgroup.com). In the Energy Policy Act
of 2005, Congress made it easier to be environmentally virtuous by offering
tax credits for cars that pollute less and homes that require less fossil
fuel to heat, cool and light, but the favorable provisions are not for procrastinators.
“In last year’s legislation, Congress created a lot of incentives,
but made many of them effective only for 2006 and 2007. People interested
in taking advantage of these tax breaks should research them now and make
sure they take advantage of them before it’s too late,” said Mark Luscombe,
JD, CPA and CCH principal federal tax analyst.
Breaks for Car Buyers
Car buyers can benefit through tax credits for the purchase
of a variety of energy-efficient vehicles. In addition to familiar hybrid
passenger cars and SUVs, the credit also applies to cars and trucks powered
by fuel cells, advanced “lean burn” diesel and other alternative power sources.
The size of the credit varies depending on the weight class of the vehicle,
its fuel economy and lifetime fuel savings.
“Fortunately, car owners probably won’t have to do a lot
of math ahead of time to figure the credit. Manufacturers will most likely
be happy to do the calculations for them,” said CCH tax law analyst Mildred
Carter, JD.
The new alternative motor vehicle credit applies to
qualified vehicles put into service starting the first of this year. This
credit replaces the clean-fuel vehicle deduction which allowed taxpayers
to deduct up to $2,000 for qualifying hybrid gas-electric cars for the
first year in which the vehicle was used.
The new credit is more generous and applies to a broader
base of fuel-efficient vehicles – including various models of hybrid, alternative
fuel and fuel cell vehicles. To qualify, each type of vehicle has to meet
particular standards, but many of the qualifications are uniform. For example,
a vehicle must be new; it must be purchased or leased for use by the taxpayer
and not for resale; and it must be made by an auto manufacturer.
Hybrid Tax Credits
For practical purposes, gasoline-electric hybrid cars
and trucks are the only alternative vehicles generally available to consumers
today. Hybrid passenger and light truck vehicles available for the credit
include the Chevrolet Silverado 1500, Ford Escape, GMC Sierra, Honda Accord,
Honda Civic, Honda Insight, Lexus RX 400, Mercury Mariner, Toyota Highlander
and Toyota Prius.
The new tax credit for hybrid vehicles applies to both
passenger cars and trucks placed into service beginning after December
31, 2005. However, the vehicle does not have to be a 2006 model. For example,
a new 2005 model purchased and first placed into service in 2006, would
still qualify for the credit.
The credit is made up of two parts: a fuel economy
credit and a conservation credit. The fuel economy credit is calculated
by comparing the fuel efficiency of the alternative fuel vehicle to that
of a 2002 gasoline-only powered vehicle for city driving. That part of
the credit has a range of up to $2,400 for an alternative fuel vehicle
that has a fuel efficiency of 250 percent of the gas-only powered vehicle.
The conservation credit is calculated by the lifetime
fuel savings of the vehicle and ranges from $250 for savings of at least
1,200 gallons of gasoline to $1,000 for 3,000 gallons.
“The amount of the credit will vary, based on the specific
fuel economy of the car purchased. A reasonable or average credit should
come in at about $1,500 to $2,250,” said Carter.
For example, a Ford Escape Hybrid gets 36 miles per
gallon compared to the 20 miles per gallon the gasoline model gets, so
the Hybrid gets 180 percent of what the gasoline model gets. That means
that the Hybrid owner could claim $1,200 for the first part of the credit. For
lifetime fuel efficiency, adding just the minimum $250 conservation credit
would bring the total qualified hybrid motor vehicle credit to $1,450.
Although the face value of this seems less than the
$2,000 deduction allowed under the old rule – it’s actually quite a bit
more as a credit is always worth more than a deduction of the same amount. For
example, for an individual in the 30-percent tax bracket the $2,000 deduction
would only be equivalent to a $600 tax credit. However, the new credit
of $1,450 in the above example would equal more than double this in tax
benefits to the hybrid vehicle buyer.
Congress
did place limits on the credit for passenger and light truck hybrids. It
is only available through 2010 and it diminishes as the vehicles become
more mainstream, phasing out for both hybrid and lean-burn vehicles once
a manufacturer sells 60,000 such vehicles.
Beginning with the second quarter after the first 60,000
have sold, taxpayers may only take a reduced credit, which phases out completely
after the fifth quarter after 60,000 vehicles have sold.
Owners of heavier business-use hybrids with a gross
weight of 8,500 pounds or more also are eligible for a credit. This credit
is equal to an applicable percentage times the qualified incremental hybrid
cost of the vehicle as certified by the manufacturer in accordance with
guidance to be issued by the IRS. The credit can go up to $30,000 for vehicles
with a gross weight of more than 26,000 pounds. The credit for these vehicles
is available only through 2009.
Credits for
Other Alternative Fuel Vehicles
Alternative fuel vehicles that operate on natural gas,
liquefied natural gas, liquefied petroleum or 85-percent methanol alcohol
also qualify for the credit. In 2005, taxpayers had the option of almost
two dozen models of alternative fuel vehicles that were not hybrids. For
these same models, the 2005 Energy Act provides up to $4,000 in tax savings
through the credit, which will expire on December 31, 2010.
Although still not readily available today, fuel cell
vehicles – powered by hydrogen and hydrogen fuel cells – also qualify for
a two-part credit. This credit is based on weight class and fuel economy
with a vehicle weighing 8,500 pounds or less qualifying for a weight class
credit of $8,000 plus a potential fuel economy credit of up to $4,000.
The credit for fuel cell vehicles is available through 2014.
Credits for Homeowners
Homeowners and homebuyers can benefit in a number of ways
from the new law during the next two years.
Homeowners can get a tax credit for 30 percent of the cost
of buying and installing residential solar water heating and photovoltaic
equipment. The maximum credit is $2,000 for each type of solar system. Solar
water heaters for swimming pools and hot tubs do not qualify.
The 30-percent credit also applies to homeowners who install
fuel cells to supply electricity. The maximum credit is $500 for each .5
kilowatt of capacity. The 30-percent credit expires at the end of 2007. However,
it’s not clear whether home fuel cells will be commercially available by
then.
Homeowners who make energy-efficient improvements to existing
homes can qualify for a tax credit. Qualifying improvements include 10 percent
of the cost of such things as insulation, metal roofs coated with heat-reducing
pigments and energy-efficient windows, doors and skylights. The maximum credit
is $500, but only $200 can come from expenses for windows. The cost of labor
is not counted in figuring this credit.
Other items that meet certain criteria qualify for credits
that have specific dollar limitations. One hundred percent of the cost, including
labor cost, is counted in figuring these credits. Advanced main air circulating
fans qualify for up to a $50 credit; qualifying natural gas, propane or oil
furnace or hot water boilers are eligible for up to a $150 credit; and some
electric and geothermal heat pumps qualify for up to a $300 credit. The credits
can be taken on 2006 and 2007 returns, but the total credits for the two
years cannot exceed the $500 maximum.
Indirect Benefits for Home, Appliance Buyers
Home buyers may benefit indirectly from a business tax credit
for the construction of new energy efficient homes. Contractors and other
suppliers installing energy-efficient heating and cooling appliances and
other items in new homes built on-site are eligible for a new credit up to
$2,000 per dwelling unit if they achieve evergy savings of at least 50 percent
over a comparable dwelling unit.
Manufactured homes qualify for the same credit if they meet
the 50-percent standard, but alternatively can qualify for a $1,000 credit
if they achieve a 30-percent improvement.
“The credit goes to the home builder, rather than the homeowner,
but builders may pass the credit through to purchasers, who would end up
with a more energy-efficient house than they otherwise could afford,” Luscombe
observed. Like the credits for homeowners, this credit expires after 2007.
A similar indirect benefit may be provided by a manufacturers’
tax credit for energy-efficient dishwashers, clothes washers and refrigerators
manufactured in 2006 and 2007.
“The goal is to encourage manufacturers to offer more efficient
and cheaper appliances that will also save consumers money on their energy
bills over the long haul,” Luscombe said.
Energy-efficient homes may also qualify for a “green” mortgage. This
is a mortgage in which a home’s energy savings is figured into the calculations
that determine whether someone can afford to buy it. The home’s lower utility
bills mean that more of a homeowner’s income can be devoted to mortgage payments. Green
mortgages have been around for some time, but their acceptance by Fannie
Mae promises to make them more widely available.
“This can make an energy-efficient home more affordable, so
people shopping for a home should inquire whether green mortgages are available
when they look for a lender,” Luscombe said.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (tax.cchgroup.com)
is a leading provider of tax, audit and accounting information, software
and services. It has served tax, accounting and business professionals and
their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax
Research NetWork™, Accounting Research Manager™ and the U.S.
Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading multinational publisher and information
services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion,
employs approximately 18,400 people worldwide and maintains operations across
Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in
Amsterdam, the Netherlands (www.wolterskluwer.com).
Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL)
and are included in the AEX and Euronext 100 indices.
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