Tax Tips: How to Save Money by Going Green

Consumers who make energy efficient upgrades may qualify for federal credits and deductions

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Now that going green is in vogue, the government is getting in on the action by encouraging taxpayers to adopt energy-efficient practices for a reward. Recent legislation provides plenty of tax incentives to eco-friendly individuals and businesses, making right now a great time to save money by going green. Here are some ways to take advantage of federal tax credits (dollar-for-dollar tax reductions) and deductions (reduction in taxable income):

Basic home improvements. You don't have to install solar panels on your roof or wind turbines in your yard to qualify for a green tax break.

W. P. Avirett, director of the advocacy group Green Research Council, says an easy way to qualify for federal tax credits is to consider energy efficiency when conducting standard maintenance on your home. "When you're going to do insulation in your attic or you're putting in new windows or you're putting in a new air-conditioning system, you can use the Energy Star standard," he says.

[See a slide show of 8 ways to go green and save on your taxes.]

Products that pass the Energy Star test generally use 10 to 50 percent less energy or water than other models. They include everyday items like storm doors, water heaters, and certain types of roofs. Avirett says that for existing homes used as a primary residence, homeowners can get a tax credit of up to 30 percent of the cost of these products, with a cap set at $1,500. So $5,000 worth of renovations could be reduced to $3,500 after the refund if you qualify.

Major renovations. While more ambitious installations dig a deeper hole in your pocket at the time of purchase, they allow for much bigger refunds come tax time.

Lindsey Buchholz, a tax analyst at the Tax Institute at H&R Block, the tax-preparation company's independent research and analysis division, says that by installing items that actually generate energy for your home, you can receive up to 30 percent in federal tax credits, without a cap. These installations include solar panels, wind turbines, and geothermal heat pumps. So $10,000 worth of renovations could be reduced to $7,000 in some cases, and a $50,000 job could be lowered to $35,000. "These things can definitely generate big credits on the tax returns," she says.

Home builders. Green tax breaks are not just for renovating existing homes: New-home builders have an opportunity to take advantage of tax incentives as well if they built more energy-efficient homes before January 1.

Under the Energy Policy Act of 2005, home builders can get a $2,000 tax credit for building a new, energy-efficient home that achieves 50 percent energy savings for heating and cooling over the minimum standard. Home builders who achieve energy savings of 30 percent could receive a $1,000 tax credit.

Lose the clunker. Not only can you save money on gas by investing in a more fuel-efficient car, but you can also qualify for a federal tax credit.

The highly anticipated Chevrolet Volt, set for production in November, is expected to come with a fairly steep price tag of $40,000. However, the car also qualifies for the maximum tax credit of $7,500 for green vehicles, bringing the price down to $32,500.

But the tax breaks for fuel misers like hybrids and the Volt are available for a limited time. Once an auto­maker has sold 60,000 vehicles, buyers qualify for just 50 percent of the vehicle's original tax credit after a certain period of time. So assuming Chevrolet sells 60,000 Volts, the credit will then fall to $3,750. In subsequent quarters, the credit drops to 25 percent and then is phased out completely. So the purchase of a 2010 Toyota Prius will not qualify for a federal tax credit because that credit expired in 2007.

However, fuel-efficient vehicles that do not qualify for federal tax breaks may be eligible for state ones.

Corporate tax breaks. Businesses that make changes in their energy systems can get federal tax credits similar to those available to home­owners. Installing a solar water heater, for example, could qualify a business for a tax credit of 30 percent of the cost.