A tax credit is a credit that reduces the amount of taxes you must pay the Federal Government. It can save you substantial money because, unlike a deduction, a tax credit reduces the amount of income subject to taxation. For example, if you purchased a more efficient water heater (AFUE 95), and a solar heating system, you might be able to reduce your taxable income by as much as $2,150

What qualifies for a tax credit?

Please be aware of the fact that not all EnergyStar homes and products qualify for a tax credit. Tax credits are reserved and available for a number of products but they must offer the highest efficiency levels. This means they normally cost more than standard products.

Tax credits are available for many types of home improvements, including adding insulation, replacement windows and certain high efficiency heating and cooling equipment. The maximum amount of homeowner credit for all improvements combined is $500 during the two-year period of the tax credit. This credit applies to improvements made from January 1, 2006 through December 31, 2007.

Tax credits for automobiles

Tax credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel and fuel cell vehicles. The tax credit amount is based on a formula determined by vehicle weight, technology and fuel economy compared to base year models. These credits are available for vehicles placed in service starting Jan. 1, 2006.

Where you can find complete details

The Government has a section titled Federal Tax Credits for Energy Efficiency (energystar.gov/index/cf,?c=products.pr_tax_credits). Go to this section and you will find a summary of tax credits for homeowners that shows how large a credit you could earn by various product categories such as windows, roofing, insulation, Heating and Air Conditioning, cars and solar energy.

All these represent a great way to save money on both your energy costs and your income taxes.

Good luck!

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Douglas Hanna is a retired marketing executive and the author of more than 100 articles on HD radio, the Internet, and family finances.