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The wheels of government do, indeed, grind slowly. But never fear, the Internal Revenue Service finally came through in late February with guidance on how taxpayers can comply with the Energy Policy Act of 2005, which was signed into law last August and took effect Jan. 1.

Under the law, owners who make certain energy-conscious improvements during the 2006 and 2007 tax years can claim a credit on their tax returns. To qualify, the law states, the component must meet or exceed the criteria established by the 2000 International Energy Conservation Code, including supplements, and must be installed in the taxpayer's principal residence.

Now, the IRS says taxpayers can rely on manufacturers claim's that their products will qualify for the credit as proof the items meet the law's requirements.

Here's a detailed rundown of how the credit works:

There are different levels of credit, depending on the type of improvement made. But the maximum amount of credit for all energy-related improvements combined and undertaken by an individual home owner cannot exceed $500 during the two-year period of the tax credit.

The credit applies to improvements "placed in service" between Jan. 1, 2006 and Dec. 31, 2007. That means projects started before the new year but not completed until afterwards qualify.

Improvements eligible for the credit include the following:

  • Added insulation to walls, ceilings or other parts of the building envelope.
  • Replacement windows.
  • High-efficiency gas, oil and propane furnaces and boilers.
  • High-efficiency central air conditioning units, including air-source and ground-source heat pumps.
  • High-efficiency fans for heating and cooling systems.
  • High-efficiency water heaters, including heat pump water heaters.

The tax credit "incentives" for each of the above improvements run like this: 10 percent of the cost for added insulation, up to $500, and replacement windows, up to $200; $150 for qualifying furnaces and boilers; $300 for qualifying a/c units; $50 for qualifying fans, and $300 for qualifying water heaters.

Besides these tax benefits, a separate credit is available for solar hot water systems installed during a three-year period beginning Jan. 1. Better yet, the limit on the credit is four times that allowed on the improvement listed above.

Home owners can write off up to 30 percent of the cost, up to a $2,000 lifetime maximum, for installing photovoltaic or solar hot-water systems used exclusively for purposes other than heating swimming pools and hot tubs. The system must use solar power to provide at least half of a home's hot water. In addition, the water must be used in the dwelling and the system must be certified by the Solar Rating and Certification Corp.

Finally, a credit also is available for the 2006-2008 period for installing a "qualified" fuel cell unit. This credit is limited to 30 percent of the cost, up to a maximum of $500 per 0.5 kW of capacity.

A good website for information concerning federal tax credits for energy-related home improvements is energystar.gov.

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