Signed by President Bush on August 8, 2005, the Energy Policy Act of 2005 (EPACT) offers consumers and businesses federal tax credits beginning in January 2006 for purchasing fuel-efficient appliances and products. Most of these tax credits remain in effect through 2007.

Buying and driving a fuel-efficient vehicle and purchasing and installing energy-efficient appliances and products provide many benefits. Better vehicle gas mileage translates into lower operating costs, fewer emissions, and reduced air pollution. Energy-efficient appliances and other products lower energy bills, increase indoor comfort, and reduce air pollution.

About Tax Credits

A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces taxes on a dollar-for-dollar basis while a deduction only removes a percentage of the tax that is owed. Beginning in tax year 2006, consumers will be able to itemize purchases on their federal income tax form, which will lower the total amount of tax they owe the government.

Home Energy Efficiency Improvement and Solar Tax Credits

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment for the home can receive a tax credit of up to $500.

The EPACT also provides a credit equal to 30% of qualifying expenditures for purchase of qualified photovoltaic systems and for solar water heating systems used exclusively for purposes other than heating swimming pools and hot tubs. The credit shall not exceed $2,000.

Improvements must be installed in or on the taxpayer's principal residence in the United States between January 1, 2006, and December 31, 2007.

Efficient Cars

Tax credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles. The tax credit amount is based on a formula determined by vehicle weight, technology, and fuel economy compared to base year models. These credits are available for vehicles purchased starting January 1, 2006.

For hybrid and diesel vehicles made by any given manufacturer, the credit will be phased out over 15 months starting after that manufacturer has sold 60,000 eligible vehicles. For vehicles made by manufacturers that have not reached the end of the phase-out, the credits will end for vehicles purchased after December 31, 2010.

Fuel Cells

There is a consumer tax credit of up to 30% of the cost (up to $500 per 0.5 kW of capacity maximum) for installing a "qualified" fuel cell and microturbine systems. The credits are available for systems installed in 2006 and 2007. This credit is not limited to the $500 home improvement cap.

Additional Information (outside links)

EPACT Overview
Detailed eligibility information from EnergyStar. Includes helpful table summarizing tax credits for homeowners.

Commercial Tax Deductions (pdf)
Consumer Tax Credits for Energy Efficicency (pdf)
EnergyStar

Light-Duty Hybrid and Diesel Vehicle Tax Credits
American Council for an Energy-Efficient Economy

Tax Incentives Assistance Project (TIAP)

The IRS has yet to publish final tax credit rules and forms. As more information becomes available, it will be posted here.

• Deduction for Energy Efficient Commercial Buildings (pdf)
• Credit for New Qualified Alternative Motor Vehicles (pdf)