Save on taxes -- by cutting your heat bill

Save on taxes -- by cutting your heat bill

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A credit of up to $500 on your 2006 return may be just the thing to make more insulation, better windows or a new water heater worthwhile.

By Liz Pulliam Weston

If you pay attention to the news, you probably heard that Congress created new energy tax credits for hybrid vehicles and solar panels. What you might have missed is a series of smaller conservation credits that could help a lot more people trim their tax bills for a much smaller outlay.

A Toyota Prius, after all, will set you back more than $20,000, while solar systems can run $20,000 to $30,000 for an average-sized house.

Another layer of insulation, by contrast, could cost you less than $500 and reduce your heating costs as well as your tax bill. New windows, doors, heating and cooling systems and water heaters also may qualify for the credits.

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The credits are for improvements made in 2006 and 2007.

The tax breaks are modest -- typically 10% or less of the upgrade's cost.

The maximum credit you can earn is $500 (that's total, not per year).
Obviously, these credits aren't enough by themselves to justify any home improvement projects. But if you were already planning some upgrades, the tax breaks could put additional money in your pocket.
"If this was something you were going to do anyway in the next, say, three to four years, you might want to accelerate (the project) to get it done before the end of 2007," said John Roth, federal tax analyst for tax research firm CCH Inc. "Otherwise I can't see spending the money unless it's going to significantly reduce your energy costs."

The tax-credit menu
Project Minimum energy efficiency Maximum credit Typical cost
Central air conditioning SEER of 15, EER or 12.5 $300 $3,000 to $6,000
Heat pumps Varies by type $300 $3,000 to $6,000
Furnaces and boilers AFUE of 95 $150 $1,000 to $4,000
Electric water heater EF of 2 $300 $500 to $600
Gas or oil water heater EF of 0.8 $300 $500 to $600
Insulation, doors, duct sealing Meets IECC standards $500 Varies
Windows, skylights Meets IECC standards $200 $150 to $400 plus installation

SEER = Seasonal Energy Efficiency Ratio; EER = Energy Efficiency Ratio; AFUE = Annual Fuel Utilization Efficiency; EF = Energy Factor; IECC = International Energy Conservation Code of 2000, plus amendments

Figuring out how much you'll save is no easy feat, however. It all depends on how much you pay for heating and cooling, how energy efficient your current systems are and whether you're planning to do the work yourself or pay for installation.

The odds of an improvement paying for itself go up if any of the following are true:


You pay a lot for energy. Energy costs are higher in the Northeast than in the Northwest, for example, and a big house will cost more than a compact one.

You plan to live in the house a long time. Even modest savings will add up over a decade or more.

The system you're replacing is more than 10 to 15 years old and ?BR>
You're paying hundreds of dollars a year for repairs.
It usually doesn't make sense to replace an old system that's working well, said Consumer Reports home expert Jim Nanni. While new heating and cooling systems may be more energy efficient, it will take years for that efficiency to offset their costs. But you might think about replacement if you're facing expensive repairs.

"If the cost of repair is 50% of the cost of a new unit," said Nanni, who manages the magazine's major appliance and home improvement group, "you probably should consider the new unit."

$15,000 in windows for a $200 credit?
Here's an example of how the payoff of one project can vary significantly.

Let's say you're thinking about adding more insulation to your house, since today's government standard is to have 12 inches of insulation and most houses have four inches or less.

Energy experts say many homes could trim their heating bills by up to 30% with proper insulation, which tends to cost 20 cents to 40 cents per square foot when you install it yourself. So if your winter heating bill is about $1,000 (about average these days) and the cost of adding another layer of insulation in a 1,500-square foot attic is $300, you'll make your money back the first year, even without the $30 tax credit.

If your house is already fairly well insulated, your heating costs are lower or you hire a contractor to do the work, your payback period might extend to several years.

New windows are another project that tends to have a long payback period, Nanni said, which is why Consumer Reports doesn't recommend changing windows merely for energy savings.

Besides, the upfront cost can be daunting if you need to replace more than a few panes.

"Around here, replacing all the windows in an average house will cost $10,000 to $15,000," said Roth, who lives in Chicago. "And the maximum credit for windows is $200."

On the other hand, new windows tend to be an aesthetic improvement that can add to the value of your house. (The latest Remodeling magazine "Cost vs. Value Index" pegs the payoff at about 85% if you sell within a year, but you'll need to take those figures with a grain of salt, as I explain in "Remodeling risks often outweigh returns.") If you're going from single- to double- or triple-glazed, you may notice a significant drop in noise as well. Those factors, combined with the eventual cost savings, might encourage you to go ahead.

Or not. You may decide to make do with what you've got, particularly if you don't plan to be in your house long enough for the improvements to pay off

No tax breaks, but still worth the small outlay
You can still save money on energy, though. Here are some fast fixes that don't qualify for tax breaks, but typically do pay for themselves within a year or less:


Compact fluorescent bulbs. Replace incandescent and halogen bulbs with these energy misers and cut your light bill immediately. Fluorescents use about a quarter of the electricity of regular bulbs.


Caulking and weather stripping. Many homes lose a lot of heat in ways that are easy to overlook, Nanni said, such as holes that allow pipes and wiring to travel between floors.


Programmable thermostats. These typically run $35 to $100 and allow you to automatically turn down the heat five to 10 degrees at night and while you're away. You'll save about 1% of your energy costs for each degree over an eight-hour period, according to energy conservation site EnergyMatch.com, so a five-degree drop at night could save you 5% on your energy bill while a 10-degree drop could save you 10%.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.