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January 26, 2006
HOW TO CUT HOME HEATING COSTS
This past Friday the stock market took a tumble falling over 213 points. Analysts say that it was the result of increasing oil prices that are approaching their all time high. I guess that it was good timing that the Massachusetts Department of Revenue issued Technical Information Release #05-18 relating to tax credits and deductions for renters and homeowners who pay for their own heat.
This is a new deduction for tax year 2005 and 2006 and available to renters and homeowners who heat with oil, natural gas or propane and have low or moderate income. Eligible taxpayers may get a deduction for up to $800 for heating costs paid between November 1, 2005 and March 31, 2006. If you do not deduct the entire $800 in 2005, the balance may be deducted in tax year 2006.
Qualifying Taxpayers – In order to be eligible for this deduction you must meet the following income guidelines:
Single Taxpayers - Adjusted gross income must be equal to or less than $50,000
Head of Household and Married Filing Joint – Adjusted income must be equal to or less than $75,000
Information Needed to Calculate the Deduction – In order to calculate the deduction for your 2005 income tax return you need to determine what your actual heating costs were for the period of November 1, 2005 to December 31, 2005. For most people, this means going through your checkbook and adding up how much you paid oil, natural gas or propane.
As usual there are some special rules; if you are a renter and heat is included in your rent, you are still eligible. You should add up the amount of rent paid between November 1, 2005 and December 31, 2005 and multiply it by 20%. This will be the amount of rent considered to be attributable to your cost of heat. If you own a two family, only the portion applicable to your residence is an allowable deduction. Condominium owners are entitled to deduct their allocable cost of heat based upon their percentage interest.
Example: Mary, a single taxpayer with adjusted gross income of 49,000 pays rent of $1,200 per month. Heat is included in her rent. For November and December she pays $2,400 in rent and will be allowed a deduction for $480 ($2,400 x 20%) for home heating fuel on her 2005 income tax return.
Also, since she only deducted $480 of the $800 allowable amount, the excess of $320 ($800-$480=$320) will be available for her 2006 income tax return.
TAX CREDIT FOR PURCHASE OF ENERGY-EFFICIENT ITEMS
Purchases made between November 1, 2005 and March 31, 2006 are eligible in calculating the amount of tax credit you may be entitled to for energy efficient items purchased for your home.
What Items Qualify for the Energy Efficient Tax Credit? The list of qualifying items is far reaching and includes everything from duct tape to new furnaces. The Mass Department of Revenue says these items “include, but are not limited to, home insulation, new window installation, advanced programmable thermostats, fuel efficient furnaces, boilers, oil, gas, propane, or electric heating systems, solar domestic hot water systems, materials for insulation or sealing of a duct, attic, basement, rim joint or wall and pipe insulation for heating systems.”
Amount of the Credit – The maximum amount of the credit is the lesser of 30% of the net expenditure for the qualifying purchases or $600 ($1,000 for a multi-unit building).
The heating fuel deduction that I explained before is just that, a deduction. To translate that to dollars in your pocket, you have to multiply the tax deduction by your tax rate to determine how much money it saved you. In Massachusetts our tax rate is 5.3%. This means that the maximum amount of money you could save based upon your heating costs is ($800 x 5.3%=$42.40.
This second section dealing with the purchase of energy efficient items allows a tax credit of up to $600 ($1,000 for multi-unit). Tax credits are much more valuable than tax deductions because for every dollar of tax credit, you save a dollar in taxes. As we saw in the example above, for every dollar of tax deductions, we only save 5.3 cents.
While it is good to get more deductions to low and middle class taxpayers, can it be made simpler? It is far too often that I have reviewed tax returns and found errors or deductions and credits that have not been claimed. Many low and middle class taxpayers can’t afford to have a professional tax preparer do their tax return. Wouldn’t it be simpler if all of these deductions and credits were done away with and we just lowered the tax rate??
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org