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New Federal Law Guts Tax Credits

The measure slashes the credits from 30% of the cost to just 10% with a $500 maximum. It also clamps dollar-specific limits on items that had previously been eligible for 30% credits.

The $858-billion federal tax bill signed into law by President Obama on Dec. 17 was a mixed bag for American homeowners, with elements of both the Grinch and Santa squeezed into the same bulging package.

The goodies for select groups were well-publicized — unemployment benefits extension, payroll tax cuts, continuation of the Bush income tax rates and favorable estate tax treatment for wealthy individuals, among others. The bill even pushed back the expiration date for the tax deductibility of mortgage insurance premiums for another year.

But other provisions in the bill could be bad news for homeowners interested in remodeling projects to conserve energy next year. The legislation slashed the popular tax credits for energy-efficient remodeling from 30% of an improvement’s cost ($1,500 maximum per taxpayer) to just a 10% credit with a $500 maximum for expenditures on insulation materials, exterior windows and storm doors, skylights, and metal and asphalt roofs that resist heat gain.

The bill also clamped new dollar-specific limits on key improvements that previously had been eligible for 30% credits. These include a $150 tax credit limit on the costs of energy-efficient natural gas, propane and oil furnaces, and hot water boilers, plus a $300 credit limit on the costs of central air conditioning systems, electric heat pump water heaters, biomass stoves for heating or water heating, electric heat pumps, and natural gas and propane water heaters.

The legislation also limits tax credits for energy-efficient windows installed during 2011 to a total of just $200 — down from the previous $1,500. On top of this, it prohibits taxpayers who have taken total tax credits in past years exceeding $500 from claiming any additional credits on energy-conservation projects they undertake in the coming year.

The net effect of all this, say home building and remodeling experts, will be to severely diminish consumers’ interest in energy-efficient home improvements. Donna Shirey, chairwoman of the Remodelers Council of the National Assn. of Home Builders and president of a contracting firm in the Seattle area, said the gutting of energy-efficiency credits “is a big step backward. It’s bad for the environment, bad for consumers and, of course, bad for jobs in our industry. We’re heading the wrong way here, sending absolutely the wrong message.”

David Merrick, president of Merrick Design & Build in Kensington, Md., and government affairs chairman of the National Assn. of the Remodeling Industry, said the $1,500 credit, which is set to expire Dec. 31, has had the effect of “opening people’s eyes to energy-conserving features they could incorporate” into home improvement projects that they might have previously ignored.

The credit, he said, has provided incentives for homeowners to ask about the long-term savings they could achieve by upgrading insulation, installing new high-efficiency windows and the like.

Now, with a $500 credit maximum, Merrick said, “I doubt that many people will see things that way. They’ll just go back to remodeling their bathroom or kitchen,” and be less willing to spend extra money on energy-saving improvements as part of the project.

Merrick added that from a contractor’s point of view, “the $500 credit will be virtually worthless — not worth the paper it will take us to process” the documentation required by the government.

Barb Friedman, Merrick’s vice chairwoman on the remodelers’ committee and president of Oswego Design & Remodeling Inc. in Lake Oswego, Ore., said that 70% of all housing units in the country are 30 years old or older, and that most have significant energy inefficiencies caused by their age alone.

“The $1,500 credit was a step in the right direction” toward providing owners financial incentives to reduce some of these inefficiencies, “but $500 is more like a drop in the bucket,” she said.

The Alliance to Save Energy, a Washington, D.C.-based coalition of business, government, environmental and consumer groups that lobbied unsuccessfully for retention of the credits as they were, said the forthcoming cutbacks in the homeowner credit program would be a loss felt far beyond the remodeling industry.

Alliance President Kateri Callahan said, “We’re sorely disappointed that Congress did not see fit to make the incentives more generous. That would have increased their use by consumers, to the benefit of our economy, energy security and environment.”

The outlook for restoration of the credits in the new Congress? Call it lights out. There’s virtually no chance of another big tax bill supporting energy-efficiency improvements moving ahead on Capitol Hill in the near future.