Sometimes, it just makes sense to spend a little money now so you can save down the road. You fork over $15 for one of the coupon books your kid's school sells because the deals could potentially save you hundreds over the next year. You hit the March and April sales to get a deal on a new winter coat, even though you won't wear it for at least six months. And you lay out the cash to make your home more energy-efficient because it will save money on utilities in the long run.
That last decision -- one of the hardest ones to make because it often involves spending a sizable chunk of money -- has been made easier by the American Recovery and Reinvestment Act.
The act, signed by President Obama in February, lays out new tax credits for green homeowners. Simple changes like adding insulation to your home and purchasing energy-efficient appliances could significantly reduce your tax bill come April 15 of next year.
Before you rush to your local home improvement store, though, read on. This guide will help you get the most from the credit, without having to drop unnecessary cash.
Play by the rules.
We saw a similar tax credit in 2007, but this year's is a bit different. You can receive a credit of 30 percent of the cost of all qualifying improvements that are utilized in 2009 and 2010, up to a maximum of $1,500. Unfortunately, the bar for what qualifies has been raised as well. "The best way to make sure your purchase is eligible is to contact the manufacturer and ask for a manufacturer's certification statement," says Karen Schneider, IT Manager for Energy Star. In many cases, the purchase must be for your principal residence, and you should save your receipts -- along with the copy of the manufacturer's certification statement -- in case you're audited in the future. Examples of qualified purchases include insulation, windows, doors and skylights, central air-conditioning units, water heaters and heat pumps.
Also note: Read carefully to see if in your case, the 30 percent only applies to the materials, not the labor. "It's a huge misnomer for people. They get a contract for doing windows. They're expecting to get the tax credit, but then they're surprised because according to the rules, only the product material costs are credited. Of the $5,000 you spent on windows, half is labor. You don't get credit for the labor," explains Charlie Szoradi, president and founder of GREENandSAVE, a green home and office remodeling resource. Visit http://energystar.gov/taxcredits for a quick guide to when labor is included in the credit and when it's not.
Pick and choose.
If you have limited funds, and your home isn't exactly energy-efficient, start by replacing what's costing you the most. One of the biggest cost savings comes from upgrading your insulation, says Schneider. "That's not the first thing people think of because you can't see it, but it's very cost-effective. The money you put in is going to pay you back in lower energy bills, and insulation is eligible for the tax credit." Having the proper insulation and sealing in a home can shave about 20 percent off your heating and cooling costs each year. Your initial outlay is going to vary, but if you're handy, the Energy Star Web site (www.energystar.gov) has a guide that will help you cut overhead by teaching you how to install the new insulation yourself.
Be smart.
This is a lot like using a rewards credit card. Sure, the rewards are great; if you were spending money you'd be spending anyway. But if you're loading up your card with unnecessary purchases just to get the 1 or 2 percent cash back, you're completely negating any benefit. And if you're not paying your balance off in full each month, you're actually losing money.
The same goes for these credits. If your water heater fails at the right time, and you can catch a tax credit for replacing it with an energy-efficient version, great. But if you're buying something you don't need -- and even worse, putting the purchase on a store credit card because you're drawn in by an introductory rate -- you're making the wrong move. Replacing items that don't need replacing is neither cost-effective nor eco-friendly. That enticing rate will jump in six or nine months and you'll pay far more in interest than you'll ever recoup through a tax credit.
Make other small changes.
These won't necessarily qualify for the credit, but little, inexpensive changes can still add up to big savings. A high-performance showerhead, for example, costs about $30 or $40, and can save you more money than installing $3,000 worth of solar panels, says Szoradi. Why? "When you reduce the water flow from 2.5 gallons a minute to 1.6 gallons, it feels like the same pressure. But if you run a 10-minute shower, you've drained half the hot water tank. It costs $300 to $400 a year to heat the water in your house." Another tip? Use your extra refrigerator or freezer sparingly. Many of us have one, in the basement or, in my case, the garage, and it's draining about $170 a year from your wallet just by being plugged in. Save money by only using it when you absolutely need it.
With reporting by Arielle McGowen
Jean Chatzky is the financial editor for NBC's "Today," a contributing editor for More magazine, and a contributor to "The Oprah Winfrey Show." She is the author of six books, including the book The Difference: How Anyone Can Prosper in Even the Toughest Times (Crown, March 10, 2009). To find out more and to read her blog, visit her Web site, www.jeanchatzky.com
