Upgrade Your Car and Home With Federal Tax Credits

by Dawn Handschuh, Personal Finance Writer   

If you need to buy a new car or make major home improvements but have put off doing so to avoid incurring new debt, you may want to consider moving forward with your plans this year or next, thanks to federal tax credits that could make your purchases more affordable.

Energy-efficient federal tax credits were first offered in 2006, but they've now been expanded and extended. The total available tax credit for home improvements, for example, has tripled from $500 to $1,500.

The American Recovery and Reinvestment Act of 2009 (ARRA) provides generous federal tax credits for Americans who either purchase a new, energy-efficient motor vehicle or make certain home improvements in 2009 and 2010. If, for example, you buy a new hybrid car or SUV, you could save between $250 and $3,150, depending on the car's fuel efficiency. (And if you buy more than one eligible vehicle, you can get a tax credit for each one.)

If you install certain Energy Star-rated furnaces, central air conditioning, boilers or windows, you could save 30% of your cost (up to $1,500).

Taking advantage of these federal tax credits is a win-win for consumers, since they'll lower their fuel bills for years to come, lower their federal tax bill in the year of purchase, and protect the environment through reduced emissions. Sweetening the pot, many states and some utility companies offer their own tax incentives (such as a sales tax exemption) for the same home improvements and new car purchases. The federal tax credit is claimed on your federal income tax form (using IRS Form 8910) when you file your taxes. The credit reduces the tax you owe or increases the size of your tax refund.

According to the Alliance to Save Energy (ASE), tax credits are better than tax deductions because they lower your taxes dollar-for-dollar, unlike a tax deduction, which lowers your taxable income. So while a 35% tax credit will lower your taxes by 100% of the amount of the credit, a 35% tax deduction will reduce your income tax by 35% of the value of the tax deduction.

Federal tax credits for energy-efficient motor vehicles

Check the ASE site for a list of tax credit-eligible vehicles and associated credit amounts, or visit the IRS website. 

Keep in mind that the tax credit is gradually phased out once a manufacturer has sold 60,000 eligible vehicles. Purchasers of Toyota hybrid vehicles are no longer eligible for the tax credit, since Toyota has sold 60,000 qualified hybrid cars and SUVs. (This phase-out applies to Lexus hybrids as well, because Lexus is owned by Toyota.) Tax credits for Honda hybrids are also no longer available, unless the car was purchased in 2008. 

Certain "lean-burn" diesel vehicles and light trucks are also eligible for the tax credits; those tax credits expire December 31, 2010, whether or not the manufacturer has sold 60,000 vehicles.

Federal tax credits for energy-efficient home improvements

Starting in 2009, homeowners can also receive 30% federal tax credits for a range of energy-efficient home improvements, including the installation of:

• New windows (skylights and storm windows included)
• Insulation (including caulk, weatherstripping and foam sealants)
• Doors
• Roofs
• Heating and cooling equipment, including central air conditioning, heat pumps, furnaces, boilers, water heaters and bio-gas (e.g., corn) stoves

The maximum amount of home improvement tax credits any one taxpayer can claim is $1,500, so the credit applies to up to $5,000 in costs. Keep in mind that not all Energy Star products qualify. You can find qualifying heating and cooling products here.  To meet the tax-credit criteria, the product must have at least a two-year warranty. The 30% tax credit includes both product and installation costs for heating and cooling equipment, but it only applies to product costs for windows, insulation, and other parts of the building "shell."

Eligible home improvements must be installed between January 1, 2009, and December 31, 2010. Use IRS Form 5695 to claim your credits at tax time. As with new car purchases, be sure to save your receipts and manufacturers' certifications.

Additional federal tax credits exist for geothermal heat pumps, solar energy and fuel cells.

Tighter credit and depleted savings may make springing for a big purchase more challenging, but thanks to incentives like these federal tax credits, it needn't be impossible.