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Top 3 Tips for Claiming the Energy Tax Credit

You don’t have to be a die-hard hippie to see the sense in adding renewable energy to your home. What stops homeowners from installing these money-saving features is often the up-front cost, but an energy tax credit can help take the sting out of that initial investment.

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First, let’s review the difference between a tax deduction and a tax credit. A tax deduction reduces your income for tax purposes, while a tax credit directly reduces your tax bill. That’s why credits feel a whole lot more satisfying.

Tax credits are available for qualified improvements that will reduce your energy use, whether that’s installing something new (like a geothermal heating system) or updating something you already have (like your boiler).

Here are our top tips for claiming energy tax credits:

1. Know Your Limits

Don’t commit to improvements you can’t afford just because you’re chasing a big energy tax credit. And if you’ve never picked up a hammer before, you probably shouldn’t try to DIY your entire solar panel installation. Once you’re aware of your limitations in the realms of money and experience, get to know the limits on your tax savings, too. Take a look at IRS Form 5695 and energystar.gov for the nitty gritty. (You want to avoid shelling out thousands only to find out that the improvements you made don’t qualify for tax savings.)

Related: Home Improvements Equal Big Tax Break

2. Get It in Writing

Make sure you’re documenting the improvements you make to your property so you can provide the IRS (or your accountant) with proof that you’ve earned your energy tax credits. This is good practice in general, but it’s also important because the energy tax credit is calculated as a percentage of what you spent. For certain improvements you can get a credit for up to 10% of your costs, and with others it’s up to 30%. Save those receipts.

3. Think Local (and State and Federal)

We’ve been talking federal taxes up to now, but many states also offer tax breaks for people who make their homes more energy-efficient. You know that house with the awesome wind turbine you pass on your way to work? Why not ring the doorbell and see if the owner is willing to let you pick her brain?

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There are plenty of tutorials and blogs on green home improvement, but it’s valuable to get a local perspective if you can. Someone local can recommend contractors in your area and might have advice on local and state programs that saved her money – and could do the same for you.

Photo credit: flickr

Amelia Josephson Amelia Josephson is a staff writer covering financial literacy topics at SmartAsset. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.

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