Limited Tax Credits

• The U.S. Department of Energy says that one group of tax credits applies to windows, doors, skylights, HVAC systems, biomass burning stoves, metal/asphalt single roofing, insulation and certain water heaters and that the credits are set to expire at the end of 2011. The credits that expire at the end of 2011 are limited to 10 percent of the cost of improvements and are subject to a lifetime maximum credit of $500. In other words, you can take more than one tax credit from the group that is set to expire in 2011, but as soon as you have taken $500 in total credits, you cannot take any more credits. Tax credits taken between 2006 and 2010 count against the $500 lifetime limit.
  
  

Credits with No Upper Limit

• While most of the tax credits the IRS offers are subject to the $500 lifetime limit, certain credits have no maximum limit. According to Department of Energy's Energy Star website, credits of up to 30 percent of the cost of solar power systems, small wind turbines and geothermal heating systems are available through 2016 with no upper limit. Fuel cells are also eligible for a 30 percent tax credit, but the credit is limited based on the power capacity of the cells. If you install these types of upgrades, you can take a credit for each improvement in addition to the credits that expire at the end of 2011.
  
  

When Do Credits Apply?

• Tax credits for energy efficiency apply to the year in which the improvements are purchased. For instance, if you bought energy efficient windows in 2010 that were eligible for a $200 tax credit, the credit applies to your 2010 tax return and cannot be used again in 2011.
  
  

Credit Carryover

• The Energy Star website states that the credits that expire at the end of 2016 may be carried over from one year to the next if you cannot take the entire credit in the year an improvement was purchased. For example, if a $4,000 solar energy credit reduces your taxable income to zero in the year you purchased solar panels and you still have $500 of unused credit, you can use the additional $500 credit to reduce your taxes in the following year.