Section 25E, introduced to the Senate by Senator Olympia Snowe on November 18, 2011, would provide a federal income tax credit for individuals who make energy efficiency upgrades to their primary residences.
Tax Credits vs. Deductions
A deduction reduces your amount of taxable income dollar for dollar. A credit, on the other hand, reduces your tax liability dollar for dollar, so it’s preferable to a deduction. A dollar saved is a dollar earned!
How much would you get under proposed Section 25E?
The proposed credit amount is tied to energy savings achieved through a home energy retrofit project. To qualify for the credit, you must get at least a 20% reduction in your home energy. The base amount for a 20% is a $2000 tax credit, and an extra $500 for every additional 5% reduction.
20% reduction = $2000 credit
25% reduction = $2500 credit
30% reduction = $3000 credit
And so on . . .
The tax credit is capped at either $5,000 or 30% of the total cost of the energy efficiency work.
No Double Dipping Allowed!
If you receive a Section 25E credit one year, you cannot also get a credit for installing renewable energy (such as solar or geothermal) or a deduction for purchasing an energy efficient appliance. Don’t forget to reduce your home’s tax basis by the amount of the credit.
What types of projects are covered?
Qualifying projects include improvements that will last longer than 5 years, such as:
The cost of an energy audit, which typically ranges from $300-$500, can be baked into the price of the upgrade.
However, specifically excluded are:
- Renovations that increase the size of your home; and
- Improvements to your pool or hot tub.
Furthermore, the work must be done by an “approved contractor,” which is someone with a BPI or RESNET certification. Your BPI or RESNET certified professional has to first calculate the cost of “heating, cooling, hot water and permanent lighting” over the course of the year prior to the work. An energy audit is typically performed to determine the upgrades that will deliver the most bang for your buck. After the retrofit is complete, a test must be performed to determine the level of energy efficiency achieved.
Flora lives in Portland, ME and owns a landscaping business. She makes $50,000 per year, pays $1,500 in interest per year for her home mortgage, and has a very leaky house. After being cold for too long and paying crazy high heating bills, she decides to get an energy audit.
Auditor Sammy comes and inspects the home with his infrared camera and performs a blower door test, determining that the home’s energy consumption could be reduced by 40% with some air sealing and additional insulation. Contractor Sandra performs the work, totaling $6000, which Flora pays out of pocket.
Here’s what Flora’s taxes are going to look like . . .
Gross Income $50,000
Mortgage Interest - $1,500
Adjusted Gross Income = $48,500
Tax Rate x $4,750 plus 25% of amount over $34,500
Tax Liability = $8,250
Tax Credit - $1,800
Total Tax Liability = $6,450
So how did we determine the Section 25E tax credit? The 40% reduction yields a $4,000 credit. Remember, though, that the credit is capped at 30% of the cost of the project. In this case, Sandra’s work cost $6,000 multiplied by 30% equals $1,800. Thus, the energy efficiency project after the credit cost Flora $4,200.
Here’s what you can do if you want to support Section 25e?
- Write to your congressional representatives and tell them you support the bill.
- Visit Efficiency First and add your support.