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ENERGY EFFICIENT APPLIANCE CREDITS - GREEN PIE IN THE SKY?

August 09, 2005

The President yesterday signed H.R. 6, the long-awaited energy bill. The bill, loaded down with corporate tax incentives and subsidies for ethanol, also has some consumer-specific provisions. These are touted in a recent press release from Senator Grassley:

* Up to a $500 tax credit for money they spend on
energy improvements in their homes. Homeowners
could qualify for as much as a $300 credit for installing
a highly efficient central air conditioner, heat pump or
water heater. Installing energy-saving windows could
net as much as a $200 credit. Those who want to take
advantage of these breaks must do so between Jan. 1,
2006 and Dec. 31, 2007. (An income tax credit directly
reduces the amount of income tax paid by offsetting
other income tax liabilities.)

* A 30 percent tax credit for the purchase of solar,
photovoltaic (or solar electric) and fuel cell properties
for use in residences.

* More access and lower prices for energy efficient
washers, dryers and refrigerators. New tax breaks for
the manufacturers of these appliances are expected to
increase the items' availability and drive down their
costs for consumers.

* Expanded tax credits for those who buy alternative
fuel vehicles, including an expansion of the range of
hybrid and clean vehicles that qualify for the alternative
motor vehicle tax credit. By purchasing such a car after
Jan. 1, 2006, consumers can get a tax credit anywhere
from $500 to $3,400, depending on the fuel efficiency
of the car.

Unfortunately, these credits are a mirage for many Iowans. These credits only reduce regular income tax - but they don't reduce alternative minimum tax. A provision to make the credits apply for AMT died in the house-senate conference on the bill.

As we've discussed, AMT applies to more taxpayers each year, especially in high-tax states like Iowa. AMT is computed at lower top rates, but with fewer deductions; when AMT higher than regular tax, you pay the AMT. Because AMT has no deduction for state and local taxes, many Iowans (and Californians, New Yorkers, Minnesotans, Wisonsinners, etc) pay AMT.

There is some cold consolation - if AMT limits your energy credits, they carry forward to future years. But that doesn't help much if you are in AMT then, too.

The moral? If you are considering an energy-efficient appliance, don't bank on the tax credits unless you know you won't be in AMT. That would probably mean you live in Texas, Tennessee, Florida, New Hampshire, South Dakota, Nevada or Washington, which lack a state income tax.

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