The recent act signed into law by President Bush was promoted by the popular press as a lucrative gift to energy companies. However, it contains a few nice tax breaks for consumers including credits for home improvements and car purchases.

A subtle but important point is that these tax breaks are credits – the best kind of tax break since they reduce tax liability dollar for dollar.

As you might imagine, the rules and calculations can be a bit cryptic.

It’s tax law after all! In any case, here’s a summary of what’s in store…

PRIMARY RESIDENCE CREDIT #1
The lifetime limit is $500. It is calculated by taking 10% of expenditures for qualified energy efficiency improvements and adding them to 100% of expenditures on qualified residential energy property. The energy-savings items must be put into use between 1/1/06 and 12/31/07.

Examples of “10% property” are metal roofs coated with heatreduction pigments, insulation materials designed to reduce heat gain or loss, exterior windows including skylights (the credit is limited to $200 for windows) and exterior doors.

Examples of “100% property” are electric or geothermal heat pumps and central air conditioners (credit limited to $300 for this category), natural gas, propane or oil furnaces (credit limited to $150 for this category) and advanced main circulating fans (credit limited to $50).

PRIMARY RESIDENCE CREDIT #2
This separate credit is equal to 30% of the cost of things such as solar water-heating equipment (maximum credit of $2,000) and fuel-cell property (maximum credit of $500 for each 0.5 kilowatt of capacity).

Again, items must be put into use between 1/1/06 and 12/31/07. The credit is disallowed if the water-heating equipment is used for a swimming pool.

AUTOMOBILES
Before we get to the new credits, there’s a change applicable to 2005 worth mentioning. Consumers are allowed a $2,000 deduction (not credit) for purchasing (not leasing) a qualifying new (not used) clean fuel vehicle. This deduction disappears after 2005 and is replaced by the following four credits for vehicles put into use on or after 1/1/06:

AUTOMOBILE CREDIT #1
Hybrids with a gross vehicle weight less than or equal to 8,500 pounds qualify for a two-part credit. The “fuel economy credit” – based on fuel-efficiency improvements versus the 2002 model year – can range between $400 and $2,400. The “conservation credit” – based on expected fuel consumption reductions over the vehicle’s life – can range between $250 and $1,000.

A little simple math tells us the maximum credit available if $3,400 – wow! This isn’t a bad deal and goes a long way in making up for the price premium of buying a hybrid.

AUTOMOBILE CREDIT #2
“Lean burn” vehicles – those that use the traditional internal combustion engine but combine it with a higher-than-normal amount of air – are eligible for the same credits as hybrids (see #1 above).

Think diesel when you hear “lean burn”.

AUTOMOBILE CREDIT #3
“Fuel cell” vehicles – those that run on hydrogen cells for example – also get a two-part credit. Part one is based on vehicle weight and part two is based on fuel-efficiency improvements over 2002 model year vehicles. Although the maximum combined credit is high ($12,000), finding a fuel cell vehicle is extremely difficult.

AUTOMOBILE CREDIT #4
“Alternative fuel” vehicles run LNG (liquefied natural gas) or some other type of fuel that is at least 85% methanol. The maximum credit here is $4,000 but, like “fuel cell” vehicles, this type of vehicle is difficult to find.

POINTS TO KEEP IN MIND
First, these credits are worthless if you get hit with the AMT – something more and more of us are dealing with under the antiquated AMT rules. Second, auto credits #1 and #2 have phase-outs tied to the number of vehicles sold per manufacturer. The idea being that foreign carmakers will benefit early-on (think Toyota and Honda) so that, down the road, American manufacturers will have full credits remaining which might provide incentives for purchases of their vehicles.

– – – – – – –

We’ll write to you again soon. Keep visiting our site for frequent updates. Keep those comments coming. We love hearing from you.