Energy-Efficiency Tax Credits Could Be Your Personal Government-Bailout Package
Published on - December 30th, 2009 (by J.D. Roth) David Kaplan wrote with the following: “A lot of personal finance blogs cover the same material. I’d like to see some quality content on the value added by investing in energy efficiencies. My prime interest is in windows/insulation and other items eligible under the current tax credit, perhaps you can consider several options.”
Since I’m not an expert in windows, insulation, or energy tax credits, I asked around and received the following. This is a guest post from Richard Barrington, a freelance writer and novelist who spent over 20 years as an investment industry executive.
There’s nothing like the holidays to make you think of cold weather — and your spending. If your wallet is as leaky as your windows, there’s a way to kill two birds with one stone. 
Making your home more energy efficient can pay for itself over time in the form of lower energy bills. And federal energy-efficiency tax credits, available until 31 December 2010, can significantly shorten the time it takes for these improvements to pay for themselves.
Smart financial moves are often talked about in terms of sacrifices: how a little short-term pain can lead to long-term gains. What’s refreshing about energy-efficiency tax credits is that they are a smart financial move that will actually make you feel more comfortable in the short term. Energy efficiency improvements can make your home warmer in the winter and cooler in the summer. (They can even make you feel a warm glow about yourself when you realize you’ve reduced your carbon footprint!)
Energy-efficiency tax credits: Eligible projects
Many of the available tax credits award you 30% of the cost of certain energy-efficient home improvements made to your primary residence between now and 31 December 2010. What are examples of eligible improvements?
- Installation of biomass stoves
- Improvements to heating, ventilating, and air conditioning systems
- Addition or replacement of insulation
- Replacement of metal and asphalt roofs
- Installation of non-solar water heaters
- Replacement windows and doors
- Geothermal heat pumps
- Residential wind turbines
- Solar energy systems
- Residential fuel cells
Different projects have different limitations on the total amount of the tax credit you can apply for, and expiration dates vary. You’ll have to go to the Energy Star website, jointly run by the US Environmental Protection Agency and the Department of Energy, for details on what counts for a tax credit.
Financial rewards of energy efficiency
The federal tax credit reduces your immediate, upfront costs from the qualified energy efficiency improvements. How much can reduced energy bills further offset your costs? Let’s look at an example of replacement windows and doors.
If you are upgrading from single-pane windows and doors, energy-efficient replacement windows and doors can save a typical homeowner between $126 and $465 per year. (Why the big spread in savings? Local utility rates and climate vary a lot, as do the size of homes and the surface area of windows and doors.)
You might think it’s the chilly northern climates that could benefit the most from replacement windows and doors, but actually the southern Atlantic region — from Maryland to Georgia — is where homeowners are estimated to save the most from this upgrade. That’s because this region can experience both sub-freezing winter conditions and extreme heat in the summer.
This is just one example of a project that offers both an immediate financial benefit — through the tax credit — and ongoing utility savings. Imagine what your monthly utility bills could look like if you did several of the projects.
The Bottom Line
As always with tax issues, you may want to check with your tax advisor to make sure you can benefit. For most people, though, these energy efficiency tax credits are a tremendous gift from the federal government — they’re basically paying you to do something that can make your home more comfortable, allow you to feel better about your carbon footprint, and save you money over time.
If you’ve been wondering where your government bailout is, you can claim it in the form of an energy efficiency tax credit.
Barrington is a regular contributor at MoneyRates. Previously at GRS, he shared how to find the right CD or money-market account and tips for sound saving and investing.
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This article is about Frugality, House and Home, Taxes
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Paying upfront for costly home renovations and then getting a portion of the money back a year later does not seem to meet the criteria for a “bailout”. Banks and auto makers got money up front and interest-free to continue business as usual.
These tax rebate plans always seem to stink of the “rich getting richer” idea. If your house needed these upgrades and you had the money, chances are you already did them and would not be eligible for the credit. If you are going to do this purely for a tax credit, then it would be assumed you already had the extra cash lying around.
A true “bailout” would be the government giving you cash upfront (interest and tax free) to use as you see fit to continue your own “business as usual”.
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This is a great program. My family has already replaced our furnace and A/C unit with the help of the tax credits. Our energy bill is already less in this Michigan Winter. I wish solar or wind were more feasible in our area, but I guess we will have to be happy with what we can do.
It’s great to know that lots of little changes like this make a large impact on the air quality and public health in our country. (Not too mention money savings on energy!)
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I am worried we’re going to need another furnace soon. I think ours isn’t living up to its expectations. I’d love to go with a geothermal furnace but they are soooo expensive. I’m cringing the day I have to drop $3k or $4k on a furnace!
I think that if I’ll get rebates it may be something to consider doing now though, rather than later!
Great post!
I would love to do solar panels too!
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We’re actually wood stove shopping today, partially because of this tax credit. Our old stove is incredibly inefficient (just a metal box burning wood), so between the savings on fuel, the tax credit, and some specials for the end of the year at the dealer, we may actually end up saving enough to “pay” for the new stove within a year or less.
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Good grief! Even at $465 savings a year (I’ll believe that when I see it!), it would take a LONG time to recover the investment in a full set of low-E windows and doors.
To see a significant energy saving, you can’t just trade out one or two windows. You have to change out ALL the structure’s windows. Double-paned windows are not cheap.
And the ten or fifteen bucks a month you might save after installing a new air-conditioning system ($3000 to $5000, in these parts) is hardly going to make the thing pay for itself.
It smacks of “saving” money by spending lots of cash at sales. If you really NEED new windows or new appliances, it’s nice to get a little kickback. But these rebates are not a good reason to run out and replace functional equipment.
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As with all things efficiency related, how much you save depends on your starting point. I had functional aluminum frame, single-pane windows, on my entire house… in Michigan.
Six plus years ago, I installed low E windows for $5,800 out the door. Including the energy efficiency tax credit I got that year, they have probably paid for themselves ALREADY!
Regards,
Ed
p.s. All told, average monthly utility savings in year one were closer to $100 per month in the cold months and $30 per month in the summer (electric is much cheaper than gas here, and it’s why AC costs much less to run). Cumulative “Year One” savings ended up reducing utility costs almost $800, and rates were raised that year.
Since the utility raises rates pretty much annualy, the relative annual savings are probably much higher today. I can safely assume I spent at least $4,800 less to the utility company simply by replacing perfectly functional hi-E windows with a more efficient solution.
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What a piss poor use of the word bailout.
For Christmas my parents bought us a storm door – it was approximately $300 bucks without installation, they get the 30% credit, how long do you think it’ll take me to recover the other $210 in energy costs?
I bet longer than I own the house.
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We got a tax write off for a new furnace/AC combination a few years ago, and this year we replaced our garage door which is also energy efficiency eligible. We would have done this anyway, and the difference between our old wood door and the new metal/insulated door is amazing — the garage is under the house and the rooms above it are warmer as is the garage itself. We may not save anything on on heating/cooling, but we count this a great gift to ourselves, I’m only sorry we waited so long (which reminds me of the NYTimes Science Times article yesterday about how people tend to put off things that give them pleasure…)
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I’ll be getting this for replacing my roof with metal–it won’t make much of a dent in the overall cost, but it will be nice to have. We had atypical weather this year, so I don’t have a very good idea of the actual energy savings yet.
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The picture lead me to think of a matter that is somewhat off topic but not too much I hope:
One place where you don’t want to lower the energy bill is your lighting. In Europe they have criminalized the incandescent light bulbs (seriously), forcing us to use compact fluorescent lamps or LED bulbs. The light from those bulbs is terrible and unpleasant. This is the first winter since the law went into effect and it has been a pain in the %$$. You _can_ get decent light from a few high quality LED bulbs, but they will cost you a fortune.
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@Bananen: My roommate doesn’t like them either, but honestly I prefer the CFL lighting. If you get the right kind it’s a crisp, white light. Kinda disappointed there’s no tax credit for those.
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This is really good as it helps save energy and cut taxes, but it may result in a loss of revenue to the government and energy cos
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We installed a gas tankless water heater ( gas bill cut in half ), wood pellet stove, (heating bill cut by 40%), and insulation of R 39 in attic ( cooling bill cut by 30%) and we will get a few bucks back after tax time. It may not be for everybody but will serve us well. We made sacrifices but feel that long term thinking will pay off. Even cut back big time to maybe get windows in 2009. These improvements to our 50 year old home have already improved living comfort and property value. It’s worth looking into.
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A few notes:
1. You can go to http://dsireusa.org/ to check out all the state, local, and even utility incentives available to make your purchases even more affordable. The federal government is not the only one offering help.
2. While some of the incentives only cover up to $1500 and must be used in 2010, some items like renewable energy systems can be installed up until 2014 with a 30% federal incentive and NO CAP.
Put that together with some local incentives and you’re getting closer to an “affordable” improvement.
3. This is one of those topics where people argue the benefit and wonder if it’s really a “good deal.”
Try to look at it from more than just a money perspective. The long term pay off of energy efficiency upgrades involves so much more than money.
Consider the environmental benefits as well as the overall benefits of moving closer to energy independence.
These aren’t the kinds of things you should be trying to place a short term pay off on. The benefit is to our society at large and you happen to get a piece of it.
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After replacing the windows on the north side of our house only and adding insulation, we saw a $45 per month reduction in heating costs plus we qualified for the federal tax credit, the Oregon tax credit and the Energy Trust rebate. In my opinion, it was worth the cost.
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The Canadian Eco-Energy plan is fantastic – they mail you a cheque with amounts that are not tied to what you spend, so if you DIY it and have a small house you can really do well.
I was given $8000 dollars after doing about $11000 dollars worth of work – my house is much more comfortable and I have cut over $600/year from my gas bill.
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The most environmentally friendly (and personal finances friendly) options, ie live smaller, simpler, consume less will never show up as tax credits. The lawyers in Washington will never offer a credit for buying a smaller house, driving less, or consuming fewer high-tech expensive enviro-gadgets.
Simple boring things like making sure your windows are properly caulked/sealed, that your wall and attic insulation is good quality and properly installed, and even just turning the thermostat down (or up in the summer) can have much greater energy and environmental impact than headline worthy “green” efforts like spending tens of thousands of dollars on buzzword solar, wind, and geothermal gadgets that often produce negligible energy and have negative environmental impact.
If you plan on grabbing any of these credits “for the environment” take a moment to think.. is there something simpler that I could do (or not do!) with this money/time that isn’t on the list? Just like with personal finances, the little efficiency credits do add up, but getting rid of the starbucks while ignoring the car payment you can’t afford doesn’t always make sense and is rarely advertised in our “it is your patriotic duty to consume more” society.
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Though not complaining about this article, it has become very clear that GRS is slowly being turned into a for-profit web site. I am interested in reading the thoughts from the original founder, not from other freelance writers. If you really want to use them, start a new blog for them. Remember that the reason you have so many visitors is you and no one else. Otherwise, readers, like me, will slowly start to drift away from your blog.
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@Peter Thorson – You make a good point. A kilowatt of energy saved is FAR more valuable than a kilowatt of energy produced.
At the same time, I think it’s a folly to use that as a reason to ignore the progress of the human race. Being environmentally friendly is not about “making do” just because it’s the right thing.
To me, it’s about continually looking for new solutions that achieve the same results without having to “make do.”
@sanjeev – I think JD has been pretty straightforward about money around here. He quit his job to run this site this year and has posted about it numerous times. Of course it’s for profit.
Yes, he publishes a lot of guest posts, but the benefit in that isn’t just for him. It also helps upcoming bloggers and it reinforces the community of the site, making it a place where people can feel comfortable sharing their success stories.
Personally, I enjoy all the guest posts quite a bit, but if you only want to hear JD’s voice every day, then I can understand how that would annoy you.
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Thanks, Tyler T. (#13), for the info…
As mentioned, readers chould also look at their state’s incentives (i.e., cash rebates for the purchase/installation of a new energy star high-efficiency appliance) as well as the incentives offered through local utility companies. I know that home improvement stores are also offering various incentives (i.e., my sister received great rebates on her purchase of new led outdoor Christmas lights).
Of course, a required purchase is part of the process; But if, for example, you have a 12-y.o. inefficient, dying dishwasher, you would definitely make out on its replacement if you are able to take advantage of a rebate from your state.
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@sanjeev (#17)
While it’s edifying to hear you appreciate my voice, Tyler’s right: There are a lot of benefits to having other writers around here. It gives exposure to new voices, it gives me a chance to do other things (like write a book!), and it takes the pressure off me to come up with new content every day.
A lot of pfblogs become stale. GRS is no exception. When I noticed this was happening, I took steps to deal with the situation. This meant bringing in other writers to add their perspective. (It also meant reducing the number of posts each week from ~12 to ~6.) I’d love to be able to write about money every day, but the fact is, it becomes tedious for me — and for you. Plus, at some point I’ve covered all of my life that I’m willing to share. Then I’m left writing about the news, and nobody wants that!
If you really do want to read my voice, and you’re not picky about subjects, bookmark jdroth.com, my personal blog. I don’t write about money there, but eventually it’ll contain my ramblings on a variety of subjects, such as books and travel. (Right now, it’s pretty dormant because I’m not finished with my book yet.) That’s not going to appeal to most people, of course, and that’s fine. But if you really want to read what I write, that’s the place to go.
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We added insulation and had air sealing done to our home recently. It cost about $6k total and we got a $2k rebate from the utility and should get another $1500 roughly between federal & state credits. So far this winter it looks like it has cut our heating bills about 25%. Should pay for itself within 8-9 years.
I wouldn’t run out and replace stuff just for a credit. But if you’re already getting something replaced or have a very old furnace or something then going with an efficient model and getting the credit is probably very worth it.
Otherwise you might start with an energy audit. Your utility might offer one for free. An expert will come to your home and tell you the best improvements to make. Then go from there.
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We replaced our furnace and ac to the tune of 9k in 2008. It needed done, but really stunk that that was an ‘in between’ year for tax credits. I wish Congress would have made it retroactive to include that year.
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I wanted to echo #13 Tyler: “These aren’t the kinds of things you should be trying to place a short term pay off on. The benefit is to our society at large and you happen to get a piece of it.”
If you are only looking at your own marginal benefit from the change, then there is no point in government intervention. You would do what was optimal for you without the government being involved. There is a place for government intervention to encourage positive spillovers to society. It is worth it for government if the social marginal benefit (the individual benefits added up plus the spillover benefits) > social marginal cost (the individual costs added up plus costs to the tax payer).
Government intervention probably won’t affect people for whom the marginal benefit + government subsidy < marginal cost. But, for people who were on the margin of making the investment, this should help.
It can also help by increasing awareness of these systems and increasing information. Some people may have not been aware of their individual marginal costs and benefits and now they are.
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For what it’s worth, I happen to like other writers’ opinions, and I know and trust J.D. to pick the best guest posts in the PF world.
Of course, this post is completely irrelevant to me, because I’m a renter. But I know every post won’t appeal to every person who reads the site.
-Erica
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My parents recently had some work done to the fireplace to better the insulation and it is amazing what a change it has made in the temperature of the room. No longer are we required to run the space heater – which is saving more money in the long run than the repairs cost. I would look into any type of insulating you can do to make your house more heat/air conditioning friendly.
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From my utility bill:
Gas 11/26/2009 To 12/28/2009 $54.89
Electric 11/26/2009 To 12/28/2009 $22.37
It makes saving money on these things a pretty low priority for me. Especially since that’s wintertime usage when these expenses are at their highest. And I rent my place, so I couldn’t really take advantage regardless.
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Ah, but Erica, it isn’t irrelevant! Perhaps you live in a utilities-included place now so you won’t personally see cost savings by introducing energy-efficient upgrades. But that probably won’t always be the case.
DH and I are still at least 5 years off being able to buy property, but we (especially I) have been researching “green” building & renovation for ten years. It’s good to know what’s out there. … We’ve got CFLs in most of our fixtures; the key to making those work is to plan your lighting for the uses of the room.
For the naysayers … you may think your current quality of life can’t be improved by energy efficiency, or that the improvement isn’t worth the cost. But if you don’t plan to stay in your home forever, these improvements also increase your resale value. And frankly, I think quality of life in the here and now is what it’s all about.
Which would be why DH and I, for example, installed a double layer of heavy drapes on the huge west-facing window in our spare room, instead of suffering through CA summers with the (hideous) vertical blinds the landlord had up. Quieter, better light control, and much less temperature variation.
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A lot of interesting views from readers.
One thing that noticed in the article:
“tremendous gift from the federal government — they’re basically paying you to do something that can make your home more comfortable”
This is not some gift, it’s the Fed printing money and needs a way to “launder” some of that money into the economy. Stimulus and kickbacks (subsidies) is the most effective way to slip in new currency into the public hands. It’s still a printed form of debt. The joke is on us!
I would still take advantage of that though if I had some needs, you damn right I would.
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This is a great thing that I will take advantage of soon. I am going to have my windows and doors all replaced with top of the line and hurricane resistant! Electric bills are always highest during the summer months, so I will see big savings then!
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@ Tyler K(#26)
How do you get your electric bill down to that level?
I also live in a small house. (Not as small as you, but way smaller than the average for where I live.)
My gas bill is slightly less than you, but I can’t get below $45-50 on my electric bill w/o living in the dark.
Congrats on you lack of usage.
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In retrospect, the $1500 tax credit did not make paying $8000 for my new HVAC (new heat pump w/ gas furnace as backup) any less painful.
The HVAC options that qualify for the credit are much more expensive and will not payback in our area with its relatively cheap electricity.
I mostly did it as a selling point for the house (“new high-efficiency HVAC that’s cut our utility bill by x%”)
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@Lefty33:
I live in a very small house. Almost all our electricity usage is lighting (all CFL), two laptop computers, laundry, and the refrigerator — we use very little electricity outside of these things. Lighting costs are kept even lower because we generally go to bed early and wake early (relatively, anyway), we’re not lighting the house till 1:00AM every night. Laundry costs aren’t too bad because we’re only two people and we don’t wash jeans and jackets after every wearing like some people do. Laptop computers are already pretty low-energy usage, and our refrigerator is a relatively new, low energy model.
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Replacing windows can take a very long time for payback, unless you live in a very cold climate and have single pane windows. There are other options that are less expensive and still effective. In a cooling climate, you can use indoor shades or outdoor screens to help rather than pay for new Low-E coating windows. When the heat is running, insulated window shades can work very well, as can storm windows.
If you already have to replace your roof, a white or metal roof will help surprisingly well for lowering the AC bill.
Insulation will likely have the best payback on the list. Start with the attic first, it’s the most important. Insulating and sealing a crawl space can save 20% on your heating/cooling bills. Also, any moisture problems you might have will be drastically reduced.
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I’d like to put these savings in perspective: Most energy efficiency products and services these days are marketed on the assumption of an average payback period of 2-3 years. That might seem to be a long time, but do the math:
Say you could do two things with your money: invest in efficiency, or invest in the stock market.
If you invest in stocks, historically you get an average return of about 10% per year, but with LOTS of risk and variability.
If instead you invest that money in efficiency with a 2-3 year payback, you get an annualized return of 30-50% on that money. Even if you were to borrow the money fromt the bank at 7% interest, these investments would STILL be better and safer than stocks.
Of course, there are caveats – you have to be in a position to collect the rewards, and you need to stick around long enough to realize the benefits. But still…it’s a neat thought experiment to think that your best investment for retirement might not be in an IRA but in lowering your future utility bills.
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The energy efficiency stimulus is a much better long term form of fiscal policy than the much heralded $8K home buyer credit. It is smart government rather a govt trying to blast the housing market with a sledge hammer for short term gains.
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I bought energy efficient windows in November of 2008, the company told me that we would be able to write them off cost me 12,000 dollars. Since I wasn’t allowed to write them off last year would I be able to write them off this year
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Is an energy tax refund being given per HOUSE or per FAMILY? What if a married couple owns 2 homes? Can they get a tax credit per each home and how?
This year we have replaced windows and doors in our house and, now our second home is desperate for new windows, doors and insulation, as well.
I would greatly appreciate the information and advice.
Thanks,
JEB
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