Unless you live in a utilities-paid rental unit, chances are you have been experiencing sticker shock over your electric bill this year. It seems no matter where you turn, energy costs have skyrocketed this year. Just when you think you have your budget back in balance by limiting your driving, you get the electric bill, and the budget is blown again.

If this has been your 2005 experience, you are not alone. Your fellow Americans are in the same boat as you, but what can you do to minimize the pain?

Energy Usage

The first step in regaining control of a runaway electric bill is to determine where you use electricity in your home. You could do it the old-fashioned way and go from room-to-room, listing the energy users in each room. If you choose this route, there are resources on the Internet to assist you in setting up a logical schedule of common energy users and wasters in your home. Your other alternative is to use an interactive tool, like the one provided by the Lawrence Berkeley National Laboratory. Either way, you should be able to get a fairly accurate picture of your home energy consumption and where you might be able to save a few dollars.

Federal Energy Credits

In August 2005, the President signed into law the Energy Policy Act of 2005 (EPA). Among other things, the EPA provided for new tax credits and replaced others, already in the tax code, designed to encourage the use of alternative forms of energy in residential settings.

Solar Energy

There are generally two ways in which solar energy is utilized in a home. The first is taking sunlight and directly converting it to electricity (Solar Photovoltaic). The second is using sunlight in hot water systems, which also can be used for space heating purposes.

The EPA provides a tax credit equal to 30% of qualified solar system expenditures up to a maximum of $2,000. Hot water systems must provide 50% or more of hot water needed in the home and they must be certified by the Solar Rating and Certification Corporation or the Florida Solar Energy Center. Photovoltaic systems do not require certification for federal credit eligibility. The credits can be used separately or together and can apply to equipment placed in service in 2006 and 2007.

New Home Construction

Homebuilders are allowed a tax credit of $2,000 for homes that reduce heating and cooling system energy usage by 50% compared to national standards. Makers of manufactured homes that reduce energy usage by 30% are eligible for a $1,000 credit. While this may seem a bit unfair since the ultimate homeowner will be paying for the home, you should be able to negotiate the price based on the existence of the credit. Even if the cost of the property is higher with greater energy efficiency, in the long run, you should come out ahead.

Existing Home Construction

Owners of existing homes also have certain credits available, should they decide to increase the energy efficiency of their homes. Expenditures on "Qualified Energy Efficiency Improvements" qualify for a 10% credit, subject to a maximum of $300, and expenditures on "Qualified Energy Property" qualify for a 10% credit, subject to a maximum of $500. The EPA defines the qualified expenses and we will be happy to discuss those with you, but suffice it to say that Qualified Energy Efficiency Improvements are generally those that are designed to reduce heat gain or loss and Qualified Energy Property generally refers to heating, cooling and hot water systems.

In addition to the overall limitations, specific items of Qualified Energy Property are limited as to the amount of available credit.

This credit is for property placed into service in 2006 and 2007.

Residential Fuel Cells

The EPA provides a 30% tax credit for qualified residential fuel cells. The maximum credit is $500 per 500 watts of capacity and is available for expenditures on equipment placed in service in 2006-2007.

State Tax Incentives

Various states also offer financial incentives for a homeowner's investment in energy efficiencies in the home. Please see the DSIRE web site for details applicable to your state.

Concluding Thoughts

Electricity costs are high and, frankly, those costs will likely not go down as much as they have increased. General worldwide pressures on oil and natural gas prices will limit how low future costs can go. However, Federal and State governments do provide limited incentives to encourage investment in alternative forms of energy in the home. The problem is that these costs are significant and should be incurred only with your eyes wide open. Before investing in home improvements just to get a tax credit, give us a call and let's discuss whether any plans you may have make economic sense as well as environmental sense.

Have a wonderful holiday season and a prosperous New Year.