Federal Energy Tax Breaks May Be Dwindling, But States Are Going Greener

(RIVERWOODS, ILL., January 2008) – Taxpayers who bought energy-efficient appliances or vehicles or made energy-saving home improvements will only have a few possible deductions for 2007, and even fewer for 2008. However, where federal tax breaks fall short, many states are stepping in to encourage their local taxpayers to be earth friendly, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“Most of the federal tax breaks available to individual taxpayers are part of the Energy Policy Act of 2005 and either expired as of last year or will expire in 2008, with the exception of some of the credits related to alternative fuel vehicles,” said CCH Federal Tax Analyst, Mildred Carter, JD. “The Clean Renewable Energy and Conservation Act of 2007 that passed in late 2007 did not include any additional federal energy tax breaks directly for individuals, as Congress pulled these provisions fearing the bill would not otherwise be enacted. As a result, individuals’ federal tax options are limited, although there are other money-saving advantages of going green and the states are continuing with their own tax-saving initiatives.”

Ironically, the dwindling federal tax breaks come at a time when more people than ever are becoming environmentally conscious and the costs of gas and home-heating fuel are escalating, making federal inaction all the more visible to consumers.

Even so, CCH State Tax Analyst Kathleen Thies, JD, points out that state-specific state tax breaks may be enough to spur some taxpayers to move forward with energy-saving initiatives.

“Individuals who live in high-tax states that are offering tax breaks for everything from hybrid cars and fuels to home improvements, may find that there’s enough tax incentive locally to make an energy efficient purchase a wise choice,” said Thies.

Alternative Fuel Vehicles Catch on, Limiting Popular Choices

At the federal level, car buyers can benefit through tax credits for the purchase of a variety of energy-efficient vehicles, including hybrid passenger cars, SUVs and trucks, as well as vehicles powered by fuel cells, advanced “lean burn” diesel and other alternative power sources that were put into service after December 31, 2005. The credit is available through 2010 or 2014, depending upon the type of alternative fuel vehicle chosen. To qualify, each type of vehicle has to meet particular standards, but many of the qualifications are the same. For example, a vehicle must be new; it must be purchased for use by the taxpayer and not for resale; and it must be made by an auto manufacturer.

“With the cost of conventional gasoline hovering around $3 a gallon and continued uncertainty on where prices are headed, more taxpayers are starting to do the math and recognizing that the cost of buying and maintaining an alternative fuel vehicle may be more affordable than they’d anticipated,” said Carter.

For hybrids, the most popular alternative fuel vehicles, the size of the credit varies depending on the weight class of the vehicle, its fuel economy and lifetime fuel savings. 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 federal tax break is good on hybrid cars purchased through 2010, but it also is tied to the number of vehicles the manufacturer sells. So once the manufacturer reaches that number for a given model, the incentive starts to disappear. As a result, credits for many of the most popular hybrids are no longer available, such as many 2008 Toyota models, including certain Prius, Highlander and Lexus hybrid vehicles purchased after September 30, 2007. Credits for Honda vehicles are reduced for purchases after January 1, 2008. Also, most GM and Ford hybrids are still available for a tax credit.

Alternative fuel vehicles operating on natural gas, liquefied natural gas, liquefied petroleum or 85-percent methanol alcohol also qualify for the credit. Taxpayers had the option of almost two dozen models of these types of alternative fuel vehicles, including the 2008 Honda Civic GX, which operates solely on compressed natural gas. Buyers of these vehicles can receive as much as a $4,000 tax credit in the year they purchase the vehicle. This credit also is good through 2010.

The tax credit on fuel cell vehicles, which are powered by hydrogen and oxygen fuel cells, also qualify for a two-part credit 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.

States Chime Tax Credits and Exemptions for Clean Cars and Fuels

Several states provide a tax credit for alternative fuel vehicles, including Colorado, Georgia, Louisiana, Rhode Island, South Carolina and Utah. Depending upon the state, the amount, criteria and which vehicles are covered varies, from broadly defined alternative fuel vehicles to hybrid and electronic or zero emission vehicles. Other states use a sales tax exemption to encourage taxpayers to buy alternative fuel vehicles, including Connecticut, the District of Columbia and New Mexico, while South Carolina will offer a sales tax rebate beginning in June 2008.

Many of the states also help taxpayers pay less at the pump through tax breaks for alternative fuel. For example, various tax exemptions, depending upon the fuel purchased, are available from Colorado, Florida, Illinois, Kentucky, New York, North Carolina, Oklahoma, Rhode Island, South Carolina and Texas. Rather than outright exemption, some states impose a reduced tax on certain types of alternative fuels, including Iowa, Kansas, Maine, Michigan, Minnesota, Montana, New Jersey and South Dakota. And, some states play it both ways. For example, North Dakota offers both a tax exemption on hydrogen fuel and a reduced tax on ethanol blend fuels.

Federal Tax Credit for Energy-saving Improvements Expiring, States Offering More

The federal tax credit for making energy-efficient improvements to existing homes expired at the end of 2007. However, taxpayers still have through 2008 to get federal tax credit for qualifying home-heating and fuel-cell equipment, and states are offering a variety of different incentives to encourage citizens to go green, from outright sales tax exemptions to sales tax holidays for energy-efficient equipment.

For taxpayers focused on their 2007 federal income tax returns, qualifying improvements that can be claimed if made during 2007 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, with all the cost, including labor, 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 apply to both 2006 and 2007, but the total credits for the two years cannot exceed the $500 maximum.

States offering tax breaks for home weatherizing improvements for 2007 and beyond include Connecticut, Montana and New York, with California also allowing taxpayers to deduct all the interest paid on loans taken out for weather-proofing their home.

For tax years 2006 through 2008, homeowners also can get a federal 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.

States Encourage Green Appliance Purchases Through Sales, Property Tax Exemptions

Many states are going much further to encourage their homeowners to invest in energy-efficient appliances. Among the most progressive states currently is Connecticut, exempting energy-efficient appliances, energy-efficient light bulbs, and solar and wind powered equipment. Massachusetts, Minnesota, New Jersey, New York and Wyoming also exempt solar and wind powered equipment from sales tax year round.

Other states, including Georgia, Maryland, Texas and Virginia, are experimenting with “sales tax holidays” for energy-efficient purchases. Whether permanent or one-day events, Thies cautions taxpayers to find out specifically what their state’s sales tax exemption rules are, from the specific appliances covered to the timing and any dollar restrictions placed on purchases, as the exemption could cover anything from refrigerators and freezers to washing machines, dishwashers, ceiling fans, room air conditioners, programmable thermostats and energy efficient light bulbs . It could apply to the total purchase amount or only up to a specific dollar amount .

“Often, the retail price of an energy-efficient appliance is more expensive, but when that higher retail price is offset by zero tax, it can make the energy-efficient choice more affordable, particularly in high-tax states like New York,” said Thies.

To a more limited extent, a few states, including Maryland and Connecticut, also are reassuring homeowners with property tax exemptions for improvements they’ve made to their property by installing certain renewable energy fixtures. As a result, if a homeowner replaces or adds qualifying energy-efficient equipment, their property tax assessment will not increase based on the value of those improvements.

Homeowners Get Green Appliances; Homebuilders Get the Credit

Through 2008, homebuyers also may benefit indirectly from a federal 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 energy 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.

“Homebuilders are offering all types of incentives to encourage people to buy, from granite countertops to landscaping. Energy-efficient upgrades may appeal to homeowners recognizing the costs of running appliances and provide homebuilders with a tax credit to help them offset losses in a stagnating real estate market,” Carter said.

On the state side, homebuilding contractors also can realize tax incentives for building energy-efficient homes in such states as Arizona, Louisiana, New Mexico and Oklahoma.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit 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, CorpSystem™, 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 global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has 2006 annual revenues of €3.4 billion, employs approximately 18,450 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com.

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