Energy Policy Act of 2005 offers significant tax breaks.

• Author: Leggiero, Heather

After four years, the energy bill has finally become law. The Energy Policy Act of 2005 (EPA '05) contains $14.5 billion in tax cuts, benefiting both individuals and businesses. While much of the emphasis has been focused on the business portions, this item discusses the incentives for individuals. (For a discussion of some of the business portions, see Muntean, "Congress's Tax Double Header," p. 674, this issue.)

Purchases and Improvements to Primary Residences

Two nonrefundable credits are available to homeowners for certain property purchased and improvements made to a primary residence--the nonbusiness energy property (NEP) credit and the residential energy-efficient property (REEP) credit. These credits are available for property placed in service after 2005 and before 2008; the property's basis is reduced by the credit(s) taken.

NEP credit: The Sec. 25C NEP credit, added by EPA '05 Section 1333, is a $500 lifetime credit across all tax years, comprised of two parts: (1) 10% of significant energy-efficiency improvements made to existing homes and (2) residential energy property expenditures.

As long as certain energy conservation codes are met, improvements that qualify for the first part of the credit are as follows:

* Insulation material or system primarily designed to reduce heat loss or gain;

* Exterior windows, including skylights and doors (limited to a $200 credit); and

* Metal roofs coated with heat-reducing pigments.

Property that qualifies for the second part of the credit is as follows (100% of cost up to overall $500 credit limit, limited by each category):

* Advanced main air circulating fans (limited to $50);

* Natural gas, propane or oil furnace or hot water boilers (limited to $150); and

* Energy-efficient building property, such as electric and geothermal heat pumps and central air conditioners (limited to $300).

REEP credit: The Sec. 25D KEEP credit, added by EPA '05 Section 1335, can be claimed by individuals who install solar hot water, photovoltaic equipment or fuel cell property in their homes. The credit is 30% of the installation cost, limited to $2,000 for solar water heating equipment, $2,000 for photovoltaic equipment and $500 for certain fuel cell property.

Purchases of Alternative Vehicles

To encourage the purchase of environmentally friendly vehicles (i.e., those propelled by clean-burning fuel), EPA '05 Section 1341(a) introduced a onetime per vehicle credit in Sec. 30B to replace the deduction currently...