Energy tax benefits for individuals.

The Service has issued a fact sheet (FS-2006-14) highlighting the changes for individuals in the Energy Policy Tax Act of 2005 (P.L. 109-58) that are available for property placed in service after 2005 and before 2008. New Sec. 25C provides personal tax credits for making a principal residence (which must be in the U.S.) more energy efficient, and for buying certain energy efficient items. At the same time, the new law provides credits for various types of alternative motor vehicles (including hybrids).

Nonbusiness energy property: The new law provides a 10% credit for buying qualified energy efficient improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer's main home in the U.S. The following items are eligible:

* Insulation systems that reduce heat loss or gain;

* Exterior windows (including skylights);

* Exterior doors; and

* Metal roofs (meeting applicable Energy Star requirements).

Residential energy property expenses: In addition, there is a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certain requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer's main home in the U.S. Eligible items include:

* $50 for each advanced main air-circulating fan;

* $150 for each qualified natural gas, propane or oil furnace or hot water heater; and

* $300 for each new item of qualified energy efficient property.

The maximum credit for all tax years is $500; no more than $200 of the credit can be attributable to expenses for windows.

Solar equipment: The new law creates a credit available to those who add qualified solar panels, solar water heating equipment or a fuel cell power plant to their homes in the U.S. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity-only generation efficiency of more than 30% and generates at least 0.5 kilowatts of electricity. Taxpayers are allowed one credit equal to 30% of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. (No part of either system can be used to heat a pool or hot tub.) Taxpayers are allowed a 30% tax credit for the purchase of qualified fuel cell power plants; the credit may not exceed $500 for each 0.5 kilowatt of capacity.

Alternative motor vehicles: The new law includes a tax credit for hybrid vehicles, which can be as much as $3,400 for those who purchase the most fuel-efficient vehicles.

Hybrid vehicles have drive trains powered by both an internal-combustion engine and a rechargeable battery. (Many currently available hybrid vehicles may qualify for this credit.) Because taxpayers may claim the full amount of the allowable credit up to the end of only the first calendar quarter that is after the quarter in which the manufacturer records its sale of 60,000 hybrid and/or advanced lean bum technology motor vehicles, taxpayers seeking the credit may want to buy early in the year.

In addition, credits are available for purchasing certain other vehicles, including fuel cell vehicles, alternative fuel vehicles and hybrid heavy trucks. The maximum allowable credit depends on the specific vehicle.

Lesli S. Laffie, J.D., LL.M.