Highlights of the Energy Policy Act of 2005 for Individuals

FS-2006-1, January 2006

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Media Relations Office Washington, D.C. Media Contact: 202.622.4000

www.IRS.gov/newsroom Public Contact: 800.829.1040

FS-2006-14, Jan. 2006

During 2006, individuals can make energy-conscious purchases that will provide tax

benefits when filling out their tax returns next year. The new law provides tax credits for

making your principal residence, which must be in the United States, more energy

efficient and for buying certain energy efficient items. At the same time the law provides

credits for various types of alternative motor vehicles, including hybrids.

Credits for Individuals Who Make Their Homes More Energy Efficient

A recent tax law change provides a tax credit to improve the energy efficiency of

existing homes. The law provides a 10 percent credit for buying qualified energy

efficiency 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 United States.

The following items are eligible:

• Insulation systems that reduce heat loss/gain

• Exterior windows (including skylights)

• Exterior doors

• Metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to residential energy property

expenses. To qualify as residential energy property, the property must meet

certification requirements prescribed by the Secretary of the Treasury and must be

installed in the taxpayer’s main home in the United States.

The following items are eligible:

• $50 for each advanced main air circulating fan

• $150 for each qualified natural gas, propane, or oil furnace or hot water heater

• $300 for each item of qualified energy efficient property.

The maximum credit for all taxable years is $500 – no more than $200 of the credit can

be attributable to expenses for windows.

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Additionally, the new law makes 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

United States. 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 percent and generates at least 0.5 kilowatts of electricity. Taxpayers are

allowed one credit equal to 30 percent 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.

Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of

qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of

capacity.

These items must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008.

Credit for Taxpayers Who Purchase or Lease Hybrid Vehicles or Other Alternative

Motor Vehicles

The tax credit for hybrid vehicles, which was enacted by the Energy Policy Act of 2005,

may be as much as $3,400 for those who purchase the most fuel-efficient passenger

vehicles and light trucks.

Hybrid vehicles have drive trains powered by both an internal combustion engine and a

rechargeable battery. Many currently available hybrid vehicles may qualify for the tax

credit.

Since taxpayers may claim the full amount of the allowable credit only up to the end of

the first calendar quarter after the quarter in which the manufacturer records its sale of

the 60,000th hybrid and/or advanced lean-burn technology motor vehicle, consumers

seeking the credit may want to buy early in the year.

The phaseout period for a manufacturer begins with the second calendar quarter after

the calendar quarter in which the manufacturer records its 60,000th sale. For the

second and third calendar quarters after the quarter in which the 60,000

vehicle is

sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar

quarters, taxpayers may claim 25 percent of the credit. For quarters after that fifth

calendar quarter, taxpayers may not claim the credit.

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For example, F Company is a manufacturer of hybrid motor vehicles, but not advanced

lean burn technology motor vehicles. F Company sells its 60,000th hybrid car on

March 31, 2006.

• Ms. Smith buys an F Company hybrid car on June 30, 2006, and claims the full

credit.

• Ms. Maple buys an F Company hybrid car on Dec. 31, 2006, and claims 50

percent of the credit.

• Mr. Grey buys an F Company hybrid car on June 30, 2007, and claims 25

percent of the credit.

• Mr. Green buys an F Company hybrid car on July 1, 2007, and is unable to claim

the credit, because the credit has phased out for F Company vehicles.

Tax credits are available for purchasing certain other vehicles.

Fuel cell vehicles are propelled by power derived from one or more cells which convert

chemical energy directly into electricity by combining oxygen with hydrogen fuel. For

passenger automobiles or light trucks, the maximum allowable credit is $12,000 but

greater credits are available for heavier vehicles.

Alternative fuel vehicles include those fueled by compressed natural gas, liquefied

natural gas, liquefied petroleum gas, hydrogen, and any liquid that is at least 85 percent

methanol. The maximum allowable credit for vehicles weighing 8,500 pounds or less is

$4,000.

Hybrid heavy trucks: For qualifying hybrid motor vehicles weighing more than 8,500

pounds but not more than 14,000 pounds, the maximum allowable credit is $3,000. For

qualifying hybrid motor vehicles weighing more than 14,000 pounds but not more than

26,000 pounds, the maximum allowable credit is $6,000. For qualifying hybrid motor

vehicles weighing more than 26,000, the maximum allowable credit is $12,000.

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