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Turn this year's refund into next year's tax credit

What if you could take this year’s tax refund, spend every dime, then get it all back, plus 30%? Impossible? Not at all.

By Stacy Johnson Mar 4, 2011 7:47PM

This post comes from Stacy Johnson at partner site Money Talks News.

 

Last year I wrote an article called Transform Last Year’s Tax Refund Into Next Year’s Tax Credit. That story was about how I invested my tax refund in a $5,000 high-efficiency central air conditioner: something that generated a cool $1,500 tax credit.

 

I’m happy to report that my new air conditioning unit has performed beyond my wildest expectations, doing a better job of cooling my Florida home while lowering my electric bills by an average of $100 a month. Even without the tax credit, that was a tax refund well spent. With the credit, it was a great investment.

 

Consider the cost/benefit: I spent $5,000 on something that definitely improved the value of my home, my quality of life and the planet. Soon, my entire investment will have been repaid: Uncle Sam is about to give me back $1,500, and I’ll be saving $1,200 a year on electricity.

 

The bad news: The $1,500 maximum credit for things like new air conditioning units expired Dec. 31, 2010.

 

The good news: There are other – and in some ways, even better – tax credits. I’ll start the explanation in the following news story: Check it out, then meet me on the side for more.

 

You can get a tax credit of 30% of whatever you spend on qualifying alternative-energy home improvements. Keep in mind that a tax credit reduces the money you actually owe, as opposed to a tax deduction, which only reduces the income you’re taxed on. 

 

The alternative energy tax credit is better than the one I took advantage of for a couple of reasons. First, rather than being capped at $1,500, this one has no cap: It’s 30% of whatever you spend. Second, it applies to improvements not just to your primary residence but also applies to second homes (but not rentals). Finally, it doesn’t expire until 2016.

 

But this credit also comes with at least one disadvantage, and it’s a biggie: You’re required to buy things that are less mainstream and often more expensive than an air conditioner. Instead, you’ll be looking at:

  • Geothermal heat pumps: A heat pump that uses the ground instead of outside air to provide heating, air conditioning and hot water. Here’s more information from Energy Star.
  • Wind turbines: A turbine that converts wind energy into electricity that ties into your house’s electrical system.
  • Solar water heaters: A water heater that uses the sun’s energy to heat water. Here are the models that qualify.
  • Solar panels or photovoltaic systems: Solar cells that capture the sun’s energy and convert it into electricity.

Even with a fat tax credit, that’s a pretty restrictive list, so just because you can doesn’t mean you should.

 

The improvement with the highest cost/benefit ratio is probably the solar water heater – they can be had for as little as $4,000 and, as you heard in the video, can shave 20% off your monthly electric bill. On the other end of the spectrum, a photovoltaic system that can power your entire house can easily cost 10 times that amount.

 

To see what qualifies for tax credits, visit the Energy Star website. There are lots of restrictions on which products qualify, as well as other details you need to know. For example, when it comes to solar water heaters, at least half the energy used to heat your home’s water must be from solar, and the credit doesn’t apply to heating swimming pools or hot tubs.

 

There are also more conventional products that can earn you smaller credits. The air conditioning system I bought, for instance, no longer earns a credit of up to $1,500: But it does still earn a credit of up to $300. Check this page of Energy Star’s website for information on other credits.

 

Depending on where you live and what you buy, your state, power company and/or the item's manufacturer may offer incentives as well. Dealers should know what’s available in your neighborhood, but here are other places you can check:

If you’ve been thinking about increasing your energy efficiency or reducing your carbon footprint and electric bill, using your tax refund to fund your project might be a bright idea. It’s a way to get your refund, spend it, earn 30% on it and make every penny back over time.

 

More stories from Money Talks News and and MSN Money:

VIDEO ON MSN MONEY

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