Calculating the Energy Efficiency Tax Credit

I've been planning on replacing some of our windows before the end of the tax year, because they are 45 years old and also because of the tax credit for energy efficiency.  This tax credit provides a 30% tax credit, up to $1500, for the replacement of windows, doors, insulation, roofs, HVAC systems, hot water heaters, and biomass heaters.  I did the math and figured that the tax credit maxes out $5000 worth of windows.  (I'm smart, huh?)

We replaced a few windows before and so I knew approximately how much it was going to cost.  I figured out which windows are most important (we have a ton of windows in this house) so that I would spend just over $5000.  The tax credit is good for the 2010 tax year, too, and by saving a chunk of the windows for next year, we'll maximize the tax benefit and we'll have time to save more money to pay for the improvements.

I called Rudy, my window guy, and asked him to come by so we could organize the project.  He mentioned the tax benefit and then said that I would need to spend around $7200 to maximize the tax benefit.  Huh?  That doesn't sound right.  It turns out, the credit is only available on the materials, not the shipping or the installation.I hoped for a minute that Rudy was wrong so I looked it up.  He was right (after all, he is the window guy.)  The credit is good on the price of the windows only.  And around $5000 worth of product ends up with a total bill of about $7200 if you are having them installed by someone else.  When Rudy did the actual calculations, he provided me with the portion of the bill that was tax deductible along with some information that will be required to prove that they are eligible windows.

(And yes, I know that I could install them myself and save a bundle.  Honestly, though, there are days I can't even get a shower.  I want these windows in before the cold comes.  This year.)

If you've been thinking of making improvements, be sure that you understand how the tax credit is calculated.  For more information, you can look at the Energy Star website.  There are other credits available for other types of energy efficient improvements and more details can be found at the same website.

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To Buy, Or Not To Buy

Recent headlines about Cash for Clunkers and the upcoming Cash for Refrigerators programs have me rethinking some of my spending plans.  Here is the situation:  my deployed husband is coming home in 2010 and we anticipate moving sometime thereafter.  Possibly outside the country.  As a result, I've got some household items that could use replacement but I'm waiting to see where we're headed:  a new car, a new refrigerator, a new vacuum, a new clothes dryer.  I've been nursing these things along because it makes no sense to buy something new just to put it in storage or try and resell it (at a loss) a few months later.  I restrained myself from using the Cash for Clunkers program to replace a car, because a car is such a large purchase, I wasn't necessarily interested in buying a brand-new car anyway, and I still need a large car and I wasn't really happy with the models that would qualify.  However, this Cash for Refrigerators program is really tempting me.

Basically, this is a federal program that uses some of the economic stimulus money to encourage purchases of Energy Star appliances.  Buyers will not need to "trade in" their old appliances to be eligible for the rebates, and the federal program can be added to state programs already in existance.  (Find a list of current state programs here.)  Individual states can decide which items will be eligible for rebates in their state.

This brings me to a dilemma...shall I go ahead and purchase new products during the rebate period?  If we stay in the states, I will be needing them.  Some of the items, such as heating and air conditioning systems, will help my house sell or make it easier to be a landlord.

It looks as if the program will become available in November and it is expected that the money will run out pretty quickly.  If you think that you might want to participate, you should start planning and contacting contractors now so that you don't miss the winodw of opportunity.  I'm at least going to talk with my husband and call around to see what might benefit my family.  I'm curious to see if you decide to make any purchases based on the incentive program.

5 Smart Ways to Use Your Tax Refund

If you overpaid taxes last year, you're getting a refund sometime this spring. That chunk of cash can quickly disappear out of your bank account if you don't have a plan for using it wisely. So, what should you do with your tax refund? Here are the five smartest moves, in order:

photo by: AComment

1. Build an emergency fund. What is an emergency fund? It is a small (or large) chunk of cash that you can get to within a few days. Savings accounts, CDs and money market accounts are all good places to keep your emergency funds. Why do you need an emergency fund? Because you never know what life is going to throw at you. Emergency funds can make things like car repairs, tickets home to see a sick relative, or exploding hot water heaters seem like small problems instead of huge catastrophes. How much of an emergency fund do you need? Well, that depends on you and your life. A single soldier living the barracks is going to need a lot less than a married airman with four kids and a 40 year old house. Try to imagine the worst possible month, financially, then make that your goal for an emergency fund. For me, that would involve a leak in my house, repairs to a car, a dead computer, and dental work that wasn't completely covered by insurance. That's a lot of money. For other people, it might be as simple as money for car repairs or plane tickets. How can I ever save that much money? Start small. Your tax refund can be a great beginning to a healthy emergency fund. Consider setting up an automatic transfer from your checking account to a savings account each month. I find it works better if it is a savings account that I can't easily access, but that is my own personal preference. 

2. Pay down debt. High interest debt, like credit cards or personal loans, should be paid off first. After that, things like car loans and possibly student loans.  There are so many benefits to this:  you'll lower the amount of interest you're paying each month, you'll pay off those debts faster, and you might even free up some money in your current budget.  A triple win!
3. Contribute to your retirement account. There are two ways for military members to do this: either change the amount that you are contributing to your TSP account (using the money from your tax return to make up the difference in your paycheck) or open an IRA. IRAs aren't scary or hard...just head over to your credit union or call USAA.
4. Save for future spending. Hoping to buy a really cool car, or put a down payment on a house? Put your money into a safe but interest bearing account. Interest rates are pretty low right now, but for longer-term money, you can get decent rates on some CDs.
5. Have a little fun. You may want to take a certain portion of your tax refund for fun. Depending on the amount of your refund, 10% (or 20%) could mean a new Xbox or a new video game. It could mean a trip to the amusement park or a trip to the bowling alley. Designating a certain portion of your return for fun will help make all the other smart choices that much more enjoyable.

With some preplanning, your tax refund can be providing benefits for years into the future.  Take a few minutes before your tax refund arrives to plan the smartest choices for your life.