As more people become aware of environmental issues and strive to reduce their carbon footprint, “green living” is becoming more common. The expense of becoming more green is almost always higher than other, less “green” options; but the good news is that over time your green living choices will save you money on a daily basis as well as on your taxes in the form of a tax credit during the year you purchase or put a green energy system into service.

What are Tax Credits?

There is some confusion between tax credit and tax deduction for many people. A tax deduction reduces your taxable income by a percentage, rather than the full amount which results in lower taxes but not by the amount of the deduction. Tax credits reduces your taxable income dollar-for-dollar, which makes them more valuable than a tax deduction in terms of savings at tax time. Realize that these tax credits are non-refundable. In other words, they can lower your tax liabilities to zero but refund you money below $0.

Federal tax credits for green energy not only save you money on your taxes, but offer further savings through lower energy bills, better gas mileage on fuel-efficient vehicles, as well as a reduction in air pollution (which was the goal of cash for clunkers). Some states offer rebates and tax incentives on green energy purchases and upgrades, too.

Tax Credits for 2010

For the 2010 tax year, there are a number of tax credits given for various green energy upgrades and purchases.

Home Energy Efficiency Property Improvement Tax Credits: you receive a federal tax credit up to 30% for the first $5k you spend on improving your home’s energy efficiency through new windows, insulation, roofs, air conditioners, doors, and heating systems (non solar). In other words, for going green you can save up to $1.5k a year. Understand that to qualify this must be an existing home and your main residence. This credit is set to expire at the end of 2010.

Residential Renewable Energy Tax Credits: you receive a 30% tax credit for installing solar energy systems like water heaters (solar) and electricity; geothermal heat pumps, wind turbines and residential fuel cell and microturbine systems through December 31, 2016. Realize unlike the credit above this credit applies to new construction, and second homes as well.

Automobile Tax Credits: you receive a tax credit for purchasing or leasing hybrid gas-electric vehicles based on the vehicle’s fuel economy and weight before 12/31/2010. Vehicles must use less gasoline than other vehicles in it’s weight class, and must meet emissions standards to qualify for tax credit. Alternative-fuel, fuel-cell vehicles, plug-in vehicles and diesel vehicles with lean-burn technology are eligible for tax credits as well. If the manufacturer sells at least 60,000 vehicles then the credit disappears. There are other limitations so check with the IRS.

Plug-In Electric Drive Vehicle Credit: There was a modification to the credit for qualified plug in vehicles (electric) bought after 12/31/2009. As long as the vehicle is purchased new, has 4 or more wheels, weighs less than fourteen-thousand pounds and is battery propelled (with at least four kilowatt hours) you can take a minimum $2.5k credit and a maximum $7.5k credit contingent on the battery life. Check the IRS.gov website if you have questions.

Electrical Plug In Vehicle Credit: There is also a new tax credit for 2 plug-in vehicle types, low speed vehicles and 2 or 3 wheeled vehicles. Low speed vehicles must have electric motors and at least 4 kilowatt hours of battery life. 2 or 3 wheeled vehicles to qualify must also have an electric motors with a battery that at least last 2.5 kilowatt hours. The credit equates to a maximum $2.5k tax credit if purchased before 1/1/2012.

Cash for Appliances: When you need a new appliance, look for the energy efficient version of the appliance for tax credit savings (be aware not all Energy Star products qualify so check with the IRS). Realize that only washers, certain refrigerators, and dryers are eligible. This program is like the “Cash for Clunkers” program that was enacted. In addition to the reduced electricity use of the new appliance, you can get a credit at tax time. Be sure to check your State (energysavers.gov/financial) to see if the program is still valid as certain states have run out of money (since the Federal government had the administration done by each state). The Cash for Appliances program includes a $50 credit on the purchase of a new energy efficient refrigerator, and is included in the 30% credit you can receive for the first $5,000 spent on qualified home improvements for the federal tax credit.

Central Air Conditioning Rebate: If replacing an outdated and inefficient central air conditioning unit; or installing a new central air unit, you can get up to a $500 rebate. If you’re able to combine this rebate with a factory or in-store discount, you could really double or triple your savings.

When transitioning to a green lifestyle, you’re not only putting money back in your pocket through tax credit and ongoing savings on energy costs – but you’re also doing your part to preserve our environment. Make sure your home improvement makes sense. For example, if you have windows, doors, and insulation that is not efficient, putting a new efficient and more powerful heating system in will do you no good.

This guest post was provided by TaxDebtHelp.com, a central online destination for taxpayers needing IRS tax debt relief tips and guidance. Find self-help articles, and answers to questions pertaining to common IRS problems.

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