The Energy Policy Act of 2005 provides valuable federal tax credits for consumers who make certain, specified energy-efficiency upgrades to their homes. Consumers who employ energy-efficient products in their homes enjoy multiple benefits. At home, these benefits include lower home energy bills, increased indoor comfort, and reduced air pollution. In addition to helping savvy consumers lower their energy bills at home, the energy-efficient products eligible for the new federal tax credits actually lower the amount of federal income taxes that these taxpayers must pay Uncle Sam.

You can get a one-time tax credit of up to $500 in total for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in your home.

What energy-efficient home improvements are eligible?

• Exterior windows (including skylights): 10 percent of the total cost, up to $200.
• Insulation, exterior doors, or pigmented metal roofs: 10 percent of the total cost, up to $500. Duct sealing and weather stripping or foam sealants may also qualify for the credit, depending on IRS rules.
• Central air conditioner, heat pump, or water heater: up to $300 towards the full purchase price.
• Furnace or boiler: up to $150 towards the full purchase price, and/or $50 for a furnace with an efficient air circulating fan.

In addition, to be eligible for the federal tax credits:

• Windows, doors, and insulation must meet the requirements of the International Energy Conservation Code, a model energy code for buildings. ENERGY STAR windows will almost always qualify.
• Metal roofs must have pigmented coatings that meet ENERGY STAR requirements.
• Heating and cooling equipment must meet stringent efficiency requirements - not even all ENERGY STAR products will qualify.

When are they available?

The home improvement tax credits apply for improvements "placed in service" from January 1, 2006, through December 31, 2007. They are not available in 2005. The IRS defines "placed in service" as when the products or materials are ready and available for use - this would generally refer to the installation, not the purchase.

Criteria for heating and cooling equipment

In order to be eligible for the tax credit, heating and cooling equipment must meet specified measures of energy efficiency:

• Central air conditioners must be in the highest efficiency tier set by an organization called Consortium for Energy Efficiency - currently seasonal energy efficiency (SEER) of at least 15 and an energy efficiency ratio (EER) of at least 12.5 for most air conditioners. This is about 15 percent more efficient than the federal standard going into effect in 2006.
• Electric heat pumps also must be 15 SEER and 13 EER and must have a heating seasonal performance factor (HSPF) of at least 9.
• Geothermal heat pumps must meet current ENERGY STAR criteria - for a closed-loop system, 14.1 EER and a coefficient of performance (COP) of at least 3.3. For an open-loop system, the criteria 16.2 EER and 3.6 COP. For a direct expansion system, 15 EER and 3.5 COP. In addition the geothermal heat pumps must include a desuperheater, which helps heat water, or an integrated water heating system.
• Natural gas, propane, or oil water heaters must have an energy factor (EF) of at least 0.80. This is about 20 percent more efficient than the current federal standard. Only some tankless water heaters currently reach this efficiency level.
• Electric heat pump water heaters must have an EF of at least 2.0. This is more than twice as efficient as the current federal standard.
• Natural gas, propane, or oil furnaces and boilers must have at least a 95 percent annual fuel utilization efficiency (AFUE) to qualify for the $150 credit. To qualify for the $50 tax credit, the furnace air circulating fan must use no more than 2 percent of the total annual energy use of the furnace.

For more information on the federal tax credits visit Energy Star and Energy Policy Tax Incentives Act of 2005.