Tax Credit vs. Tax Deduction
- There are two types of tax benefits that help to reduce the amount of taxes a person owes, possibly producing a refund in some cases. Taxpayers use tax deductions to reduce their taxable income for the year. Taxpayers apply these deductions prior to determining tax liability for the current tax year. Tax credits, on the other hand, apply directly to tax liability. Some credits are refundable, meaning you can reduce your tax liability to a negative number and receive a tax refund.
Applicable Wind Energy Equipment and Properties
- The residential energy efficient property credit covers several different types of equipment that allows an individual to make use of alternative fuel sources, such as wind turbines. The credit covers the installation and costs associated with putting in place a small wind turbine to help fuel the home. This home does not have to be your principal residence; it needs only to be a home that you own and located within the United States.
Limits and Coverage
- You may claim a credit for up to 30 percent of the cost of the qualified property in 2010 or 2011. The cost of the qualified property includes initial purchase price and installation costs. This credit is nonrefundable, meaning you can only claim the amount that reduces your tax liability to $0. It will not allow you to receive a refund. However, you may carry any remaining amount forward to the next tax year. For example, if you have a qualified property worth $16,000, your available tax credit would be $4,800 ($16,000 x .30 = $4,800). If your tax liability to the IRS is $3,000, you can take $3,000 of the credit and use the remaining $1,800 to reduce the subsequent year's tax liability.
Other Energy Types
- There are other types of alternative energy improvements that qualify for the residential energy efficient property credit. Solar electric and solar water heating, fuel cells and geothermal heat pumps will also allow you to claim a tax credit. Each of these has a 30 percent limit as well, except the fuel cell property. The limit for this property is the lesser of 30 percent of $500 for each 0.5 kw of capacity.