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2010 CCH Whole Ball of Tax
CCH Outlines Tax Incentives Fueling Interest in Going Green
(RIVERWOODS, ILL., January 2010) – Just as incentives for taxpayers to be more energy conscious began to dwindle, several popular tax breaks affecting 2009 and 2010 taxes were restored, expanded or added through the American Recovery and Reinvestment Act of 2009 (ARRA), according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Both the types of improvements or purchases that qualify for credits as well as the maximum credit amounts have increased in many instances,” said CCH Senior Federal Tax Analyst Mildred Carter, JD. “The current administration has pledged to expand development and production of alternative sources of energy, in part to create “green collar” jobs. So it makes sense that it would want to encourage taxpayers to make energy-efficient purchases.”
Wealth of Energy-efficient Tax Breaks for Homeowners, Condo Owners
The two main energy credits available to homeowners are the non-business energy property credit and the residential energy efficiency property credit, both claimed on Form 5695, Residential Energy Credits.
While the names sound similar, the rules and what they cover are quite different.
- The non-business energy property credit provides a tax credit of 30 percent to a maximum of $1,500 for both 2009 and 2010. It applies to the installation of insulation and energy-efficient exterior windows and doors, heat pumps, furnaces, central air conditioners and water pumps.
“Pre-ARRA, homeowners were only allowed a 10-percent credit to a maximum of $500 for 2009,” said Carter. “ARRA significantly expanded this; however, homeowners need to understand that under the new rule the $1,500 maximum applies to both 2009 and 2010. So, if they claim $1,000 of the credit on their 2009 tax return, for example, they can only claim an additional $500 for 2010.”
- Under the residential energy efficient property credit, homeowners can receive a credit of 30 percent of the cost for the installation of alternative energy equipment in their home. The credit is for eligible solar water heaters, solar electricity equipment, fuel cell plans, qualified small wind energy property and qualified geothermal heat pumps. This credit applies for tax years 2009 through 2016.
Prior to ARRA, $2,000 was the maximum credit allowed for alternative energy. With the exception of fuel cell equipment, ARRA eliminated the maximum dollar cap on the credit. The maximum amount for fuel cell equipment remains $500 for each half-kilowatt hour.
“Both taxpayers owning single family homes and those owning condominium units can take this credit,” said Carter. “Condominium owners can claim the credit by splitting the equipment installation cost with other unit owners and claiming the appropriate amount based on the divided cost.”
Drivers Plug-in to Vehicle Tax Breaks
The $3 billion “cash for clunkers” rebate program designed to encourage drivers to turn in their less fuel-efficient cars may have been the most visible example of the federal government enticing taxpayers to drive green. However, tax incentives also were at work, with ARRA adding more, including expanding and creating a separate credit for plug-in electronic drive vehicles starting in 2010.
For 2009, the plug-in electric drive motor vehicle credit for consumer-focused plug-in vehicles ranges from $2,500 to $7,500 depending on certain factors, such as battery capacity, determining the value of the credit. For example, there is an additional $200 of credit for each added kilowatt-hour after the minimum 4 kilowatt-hours required.
Starting in 2010, the guidelines are similar with the credit for plug-in electric drive vehicles ranging from $2,500 to $7,500. However, more people may be able to claim more as the credit amount increases to $417 for each kilowatt-hour of capacity after the required minimum 4 kilowatt-hours. The credit will begin to phase out once the manufacturer records its 200,000th sale. To claim the credit, vehicles must be newly purchased, have four or more wheels and weigh less than 14,000 pounds.
Under ARRA, both certain low-speed electric vehicles with a battery capacity of at least 4 kilowatt-hours and two- or three-wheeled vehicles with a battery capacity of 2.5 kilowatt-hours also become eligible for a new plug-in electric vehicle credit. The credit is 10 percent of the cost of the vehicle up to $2,500 for vehicles purchased after February 17, 2009, and before January 1, 2012. Taxpayers can’t claim this new credit if they are eligible for the plug-in electric drive vehicle. Taxpayers also can take a credit for converting a vehicle to a qualified plug-in electric drive motor vehicle. The credit is 10 percent of the conversion cost up to $4,000 and is effective for conversions made after February 17, 2009, and before January 1, 2012.
Taxpayers take the Qualified Electric and Plug-in Electric Vehicle Credit on IRS Form 8834.
In addition to the plug-in vehicles, several types of cars qualify for the alternative fuel motor vehicle credit, including:
- Hybrid vehicles . Unless Congress extends it, 2010 will be the last year that t he federal tax break for hybrid car purchases is available. However, because this law also is tied to the number of vehicles the manufacturer sells, many hybrid models already are no longer eligible or eligible only for a reduced credit amount. Specifically, the credit begins to phase out in the second calendar quarter after the quarter in which the manufacturer sold at least 60,000 hybrid and advance lean burn passenger vehicles and light trucks. As a result, credits are no longer available for Toyota, Lexus or Honda models, and the credit for Ford and Mercury vehicles began to phase out in June 2009. Full credits are still available for Chevrolet, Dodge, GMC, Nissan, Saturn and a few other hybrid manufacturers.
The specific credit amount available for hybrids 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.
- Alternative-fuel vehicles . Vehicles operating on natural gas, liquefied natural gas, liquefied petroleum or 85-percent methanol alcohol also qualify for a tax credit. While most of these vehicles are commercial vehicles and trucks, taxpayers have a few car options, including the 2009 Honda Civic GX, which operates solely on compressed natural gas. Buyers of these vehicles can receive a maximum $4,000 tax credit in the year they purchase the vehicle. Like the credit for hybrids, this credit also expires at the end of 2010 unless Congress extends it.
- Fuel cell vehicles . These vehicles, which are powered by hydrogen and oxygen fuel cells, 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. For example, the tax credit for the 2009 Honda FCX Clarity hydrogen-powered vehicle is the maximum $12,000. The credit for fuel cell vehicles is available through 2014.
Taxpayers claim the Alternative Fuel Motor Vehicle Credit on IRS Form 8910.
“There are still only a limited number of vehicles eligible for the alternative vehicle tax credits and they generally carry a premium price,” said Carter. “So, in a tough economy, people may be more inclined to choose conventional gas-powered vehicles, especially given that gas prices were lower in 2009.”
States Provide Added Incentives for Energy-efficient Purchases
States also provide tax incentives to residents for purchasing alternative-fuel vehicles and making energy-efficient home improvements. Additionally, while federal tax breaks for energy-efficient appliances are geared to manufacturers, many states go much further by encouraging homeowners directly to buy eco-friendly appliances and supplies.
ARRA provides an added boost to states to encourage residents to purchase energy-efficient appliances. Under ARRA, nearly $300 million in funding was made available for state-run rebate programs for consumer purchases of new ENERGY STAR® qualified home appliances. Dubbed “cash for appliances,” most of these programs will begin in 2010 and are not tied directly to taxes.
States already offering tax breaks for energy-conscious residents include Connecticut, which provides a sales and use tax exemption for solar energy-generating systems, energy-efficient appliances and light bulbs as well as residential weatherization products. Massachusetts, Minnesota, New Jersey and Wyoming also exempt certain solar- or wind-powered equipment from sales and use or property tax year round.
Many states also offer “sales tax holidays” for energy-efficient purchases. These include Georgia, Missouri, North Carolina, Texas, Virginia and West Virginia. Maryland is scheduled to begin offering a sales tax holiday for energy-efficient purchases in 2011. South Carolina was to begin offering a sales tax holiday for energy-efficient purchases in 2009, however, the law including this provision was ruled unconstitutional.
“Residents in states with progressive tax breaks and generous rebate programs under the ARRA funding may get a double benefit on their energy-efficient purchases – no sales tax and a cash-back rebate,” said CCH Senior State Tax Analyst Carol Kokinis-Graves, JD. “Given that energy-efficient appliances are often more expensive, the tax and rebate savings should make these appliances more affordable to more people.”
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 since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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