Enhanced Residential Energy Credit

Congress recently enhanced the tax credit for solarturbines installed on a second residence appear to
energy and added two new energy systems to the listcomply. This component of the credit is limited to $500
of residential energy enhancements qualifying for thefor each 1/2 kilowatt of capacity, not to exceed
residential energy efficient property (REEP) credit. The$4,000.
recently enacted Energy Improvement and ExtensionIn addition, the 30% credit is now available for qualified
Act of 2008 (Energy Act) includes these provisionsgeothermal heat pump system property expenditures.
designed to give taxpayers an immediate tax breakA qualified geothermal heat pump is geothermal heat
and partially cover the cost of these new systemspump property installed on or in connection with a
that will lower future energy bills.dwelling unit located in the U.S. and used as a
Prior to the Energy Act, individuals were allowed a taxresidence by the taxpayer. As with wind property, it
credit for REEP expenditures for qualified solar waterappears that geothermal heat pumps installed in a
heating and photovoltaic systems. These credits,second residence will qualify for the credit. This
available for systems placed in service betweencomponent of the credit is limited to $2,000 for any
January 1, 2006, and December 31, 2008, amounted toqualified geothermal heat pump system expenditure.
30% of the system’s cost. The credit for individualsPrior to the Energy Act, heat pumps qualified for the
was 30% per system in any tax year, but wasnonbusiness energy property credit, but that credit
capped at a maximum of $2,000 per system.amount was limited to $300.
For tax years beginning after December 31, 2008, theWith the enhancement of the REEP credit, Congress
Energy Act makes several enhancements to previoushas given taxpayers an even greater opportunity to
legislation. First, the credit is extended for an additionalsave on taxes and their future energy costs as well.
eight years through 2016. Next, the $2,000 cap forThis law change also presents a tax planning
solar water heating property expenditures is eliminatedopportunity since delaying the installation until 2009
and the credit will be 30% of the system’s entirecould result in a new or higher tax credit. For example,
cost. This allows a taxpayer installing a $30,000if, during 2008, a taxpayer spends $10,000 on solar
system to receive a $9,000 tax credit where, prior toenergy property, the credit will be limited to $2,000 (the
the Energy Act, the credit would have been limited tocap). However, if that same taxpayer delayed the
just $2,000. A nice break considering the high cost ofpurchase until 2009, the credit would be $3,000
these systems. Finally, the credit is fully available to($10,000 × 30%).
offset the AMT in 2009. As with prior law, the dwellingPlease contact us to discuss the REEP credit or any
unit must be located in the U.S. and be used as aother tax compliance or planning issue.
residence by the taxpayer.To ensure compliance with requirements imposed by
The Energy Act adds small wind energy property andthe IRS, we inform you that, unless specifically
geothermal heat pump systems as components eligibleindicated otherwise, any tax advice contained in this
for the REEP credit. Qualified small wind energycommunication (including any attachments) was not
property is property that uses a wind turbine tointended or written to be used, and cannot be used, for
generate electricity for use in connection with athe purpose of (i) avoiding tax-related penalties under
dwelling unit in the U.S. and used as a residence by thethe Internal Revenue Code, or (ii) promoting, marketing,
taxpayer. The Code does not require the residence toor recommending to another party any tax-related
be the principal residence of the taxpayer. So, windmatter addressed herein.