MyTownCryer

Washington is giving you less green for going green, as the feds reel back the 2011 energy tax credits from a lavish $1,500 to a paltry $500.

Other limits on energy tax credits besides $500 max

• Credit only extends to 10% of the cost (not the 30% of yesteryear), so you have to spend $5,000 to get $500.

• $500 is a lifetime limit. If you pocketed $500 or more in 2009 and 2010 combined, you’re not entitled to any more money for energy-efficient improvements in the above seven categories. But if you took $300 in the last two years, for example, you can get up to $200 in 2011.

• With some systems, your cap is even lower than $500.

• $500 is the max for all qualified improvements combined.

Certain systems capped below $500

No matter how much you spend on some approved items, you’ll never get the $500 credit–though you could combine some of these:

And not all products are created equal in the feds’ eyes. Improvements have to meet IRS energy-efficiency standards to qualify for the tax credit. In the case of boilers and furnaces, they have to meet the 95 AFUE standard. EnergyStar.gov has the details.

Tax credits cover installation—sometimes

Rule of thumb: If installation is either particularly difficult or critical to safe functioning, the credit will cover labor. Otherwise, not. (Yes, you’d have to be pretty handy to install your own windows and roof, but the feds put these squarely in the “not covered” category.)

Installation covered for:

• Biomass stoves

• HVAC

• Non-solar water heaters

Installation not covered for:

• Insulation

• Roofs

• Windows, doors, and skylights

How to claim the 2011 energy tax credit

• Determine if the system you’re considering is eligible for the credits. Go to Energy Star’s website for detailed descriptions of what’s covered; then talk to your vendor.

• Save system receipts and manufacturer certifications. You’ll need them if the IRS asks for proof.

• File IRS Form 5695 with the rest of your tax forms in 2012.

This article provides general information about tax laws and consequences, but isn’t intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice, and remember that tax laws may vary by jurisdiction.

By: Donna Fuscaldo

Published: January 26, 2011

Donna Fuscaldo has written about alternative energy for Dow Jones, the Wall Street Journal, and Fox Business News for more than a decade. She is currently renovating her house with an eye toward energy efficiency and green technologies.

Sidestep snares in the complex IRS Form 5695 to get all the 2010 energy tax credits you’ve got coming.

Fill out the right part of Form 5695

What type of system did you install? If it’s one of the following, complete Part 1 for Nonbusiness Energy Tax Credits.

• Biomass stoves

• Insulation

• HVAC systems

• Roofs

• Non-solar water heaters

• Windows, doors, skylights

• Storm windows and doors

Max credit: 30% of the cost of the improvement, up to $1,500.

If you installed one of these souped-up systems, complete Part 2 for Residential Energy Efficient Property Credit.

• Geothermal heat pumps

• Residential wind turbines

• Solar energy systems

• Fuel cells

Max credit: 30% of the cost, with no limit except for a kilowatt limit on fuel cells.

What do I need on hand to fill out Form 5695?

• Receipts that show the amount you spent. The feds won’t pay for installation for some items. For those, the receipts must separate out the labor so you can add just the cost.

• Manufacturers’ certifications indicating that the improvements are eligible for the credit. Store them in a safe place in case the IRS asks for them in the future, but no need to file them with your return.

Coordinate with Form 1040 and other forms

For Part I, it’s pretty simple: Just enter the total of all this part’s credits (as shown on line 11) on Form 1040, line 52.

For Part II, it can get complicated because other credits, claimed on other forms, can affect the amount of your Part II credit.

If you need to fill out any of the following forms, have all the information needed to complete those at hand, because Form 5695, line 25, coordinates with all of them. (In fact, you’ll find it simplest to prepare all these forms more or less simultaneously.)

• Form 1040—lines 47 through 50, which refer to other credits you may be eligible for

• Publication 972—the child tax credit

• Form 8369—mortgage interest credits you may have

• Form 8859—tax credits applicable only to residents of the District of Columbia

• Form 8834—electric vehicle credit

• Form 8910—alternative motor vehicle credit

• Form 8936—electric drive motor vehicle credit

• Schedule R—care for the elderly or disabled

One form that’s irrelevant to completing 5695: Schedule A. That’s only for deductions, not credits. And you don’t even need to itemize to claim energy tax credits.

The pitfalls of Form 5695

You’ll find many places you can go wrong in both parts of the form:

Adding ineligible amounts into the form. Just because a product has an Energy Star label doesn’t mean it’s eligible for a credit. Check the details of what’s eligible for the credit and what’s not at Energy Star and make sure the product comes with a manufacturer’s certification.

Failing to keep track of this year’s energy tax credits for future years. Hang on to your tax credit paperwork (including receipts, certifications, and a copy of your completed Form 5695), because if you sell your house you’ll need to record the tax credit amount for tax purposes.

• Say you bought your home for $100,000 (the basis) and sold it for $400,000. Your profit is $300,000. But by taking tax credits, you lower your basis, so when you sell the house, you increase your profit in the eyes of the IRS. If you’re in your home for a long time and it appreciates, you increase your chances of getting hit with capital gains. Still, there’s little cause to worry: The government gives married couples selling a home a free pass on up to $500,000 of profit.

Failing to file this form at all—or only partially. If you’re eligible for a lot of different tax credits, you can conceivably reduce your tax liability to zero. If that’s the case and you want to tack on the 2010 energy tax credit, you’re out of luck. The feds consider it nonrefundable. If it were a refundable tax credit, the IRS would write you a check.

• Loophole only if you added a Part II improvement: You can carry the energy tax credit forward to 2011—or even beyond, at least as far as 2016. Even if you’re not eligible this year because you reduced your tax liability to zero, file Form 5695 anyway to make it easier to do the carryforward next year. Or just hold off installing that wind turbine until a year when you anticipate you’ll have fewer tax credits.

Forgetting certain credits that affect Part II—and vice-versa. Pay special attention to line 25: Certain other credits may ultimately affect your ability to fully claim Part II credits—just as Part II credits may affect other credits. Follow the line-by-line instructions in each form carefully. It’s easy to forget a number here.

Ack, I want help filling out Form 5695

If you find Form 5695 exasperating, you may be eligible for free tax preparation help from the:

• Volunteer Income Tax Assistance Program

• Tax Counseling for the Elderly

• IRS at 800-829-1040.

Major tax preparation software, such as TurboTax, include this form in their packages.

By: Barbara Eisner Bayer

Published: January 27, 2011

Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.

Get an “A” on your Schedule A Form: Dodge these tax deduction pitfalls to save time, money, and an IRS investigation.

Trap #1: Line 6 – real estate taxes

Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes.

The money you send the bank may be more than what the bank pays for your taxes, says Julian Block, a tax attorney and author of Julian Block’s Home Seller’s Guide to Tax Savings. That will lead you to putting the wrong number on Schedule A.

Example:

• Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes

• Your annual property tax bill: $5,500

Now do the math:

• Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.

• Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid.

Trap #2: Line 6 – tax calculations for recent buyers and sellers

If you bought or sold a home in the middle of 2010, figuring out what to put on line 6 of your Schedule A Form is tricky.

Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. If you bought or sold a house in midyear, you should instead use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.

Here’s why: Generally, depending on the local tax cycle, either the seller gives the buyer money to pay the taxes when they come due or, if the seller has already paid taxes, the buyer reimburses the seller at closing. Those taxes are deductible that year, but won’t be reflected on your property tax bill.

Trap #3: Line 10 – properly deducting points

You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct only $100 per year on your Schedule A Form.

Trap #4: Line 10 – HELOC limits

If you took out a home equity line of credit (HELOC), you can generally deduct the interest on it only up to $100,000 of debt each year, says Matthew Lender, a CPA with EisnerLubin LLP.

For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interest paid on $200,000. But you can deduct only the interest paid on $100,000. If you just pull the number off Form 1098, you’ll deduct more than you’re entitled to.

Trap #5: line 13 – Private mortgage insurance

You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. (Also, this is also a good time to review your PMI: You might be able to cancel your PMI altogether because you’ve had a change in loan-to-value status.)

Trap #6: line 20 – casualty and theft losses

You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:

• Only deduct losses that are greater than 10% of your adjusted gross income (line 38 of Form 1040).

• Fill out Form 4684, which involves complex calculations for the cost basis and fair market value.  This form gives you the number you need for line 20.

Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.

By: Barbara Eisner Bayer

Published: January 27, 2011

Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.