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Energy Tax Incentive Basics
The Energy Policy Act of 2005
The Energy Policy Act of 2005 was signed into law by President Bush on August 8, 2005 and offers many benefits for increasing the efficiency of residential, commercial and industrial construction materials. Most importantly, it provided tax incentives for each piece of equipment that conformed to standards of energy efficiency set by the Environmental Protection Agency, directed by the Energy Star program. One of the Act's provisions applied to any replacement windows that were installed between January 1, 2006 and December 31, 2007. Homeowners who put in energy efficient replacement windows received a tax credit of 10% of the windows' cost (not including installation), up to $200. This act was later replaced by the American Recovery and Reinvestment Act of 2009 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
The U.S. Department of Energy maintains a website on the Energy Policy Act of 2005.
Tax Credit versus Tax Deduction
One benefit of the Act is that it provided for a tax credit, rather than a tax deduction. A tax deduction simply eliminates a percentage of overall taxes owed by subtracting a sum before your tax liability is calculated. A tax credit, like the $200 that the Energy Policy Act provided removed taxes dollar for dollar and subtracted from total tax liability after all calculations have been made. A tax credit will generally benefit a taxpayer three times the amount a deduction would.
Incentive Claiming Process
You should keep documentation of any windows you have installed. You may also want to keep records of any other remodeling or construction that improves the energy efficiency of your home. Projects like adding insulation and installing heating, ventilation or air conditioning may merit tax credits sometime in the future.
If you did not claim a qualifying tax credit in a previous year then it still may be possible to file an amended tax return for that year in which the improvement took place. However, you may not claim the improvement on your current tax return. For more information, visit the IRS website.
What does it mean to be Energy Star?
Not all energy efficient windows were subject to this tax incentive. Only those windows that were designated as "Low-E" and approved by the Energy Star program in 2005 were eligible for the tax benefit. All Energy Star-approved products are labeled with an insignia you will probably recognize from window panes, as well as energy efficient computer monitors. Energy Star windows meet the highest standard of efficiency and have been tested and approved by the EPA.