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UNDERSTANDING THE $1,500 TAX CREDIT

AND WHY INSTALLING A 95% EFFICIENCY FURNACE THIS YEAR CAN

EARN YOU TAX SAVINGS

Key concepts

                        tax deduction

                        taxable income

                        income taxes

                        tax credit

• Taxable income is what creates income taxes owed.
• A tax deduction is a dollar for dollar reduction of taxable income. 
• Taxable income creates income taxes owed according to your tax bracket.
• A tax credit is a dollar for dollar reduction of income taxes owed as a result of taxable income.
• A tax credit is therefore much more valuable than a tax deduction because it reduces the taxes owed on taxable income dollar for dollar.
• The real economic value of the $1,500 energy tax credit depends on the individual’s tax bracket.

Federal Income Tax Brackets For 2010 – Based On Taxable Income---not gross income---Ranges

Tax Rate Married Couples Filing Jointly Most Single Filers 10% Not over $16,750 Not over $8,375 15% $16,750 – $68,000 $8,375 – $34,000 25% $68,000 – $137,300 $34,000 – $82,400 28% $137,300 – $209,250 $82,400 – $171,850 33% $209,250 – $373,650 $171,850 – $373,650 35% Over $373,650 Over $373,650

Examples of calculating the real economic benefit of the credit to a qualified taxpayer.

The home owner is in the 25% tax bracket.  This means that for every taxable dollar of income, the owner creates $00.25 of income tax liability.  It is a simple 4:1 ratio.  Therefore, a $1,500 tax credit is the same as if the owner was able to take a one time deduction off of their taxable income of $6,000.  $6,000 x 25% = $1,500 tax savings.  So the tax credit is worth much more than just $1,500. 

Another way of looking at it in terms of a tax deduction, putting in a new 95% efficient furnace (for someone in the 25% tax bracket) is the same as the owner being able to “write off” $6,000 off of their taxable income. 

The new energy efficient furnace really does not really cost the owner in a 25% bracket anything.  The first $6,000 cost of a new 95% furnace is “free” because of the value of the tax credit to someone in the 25% bracket offsets the cost (up to $6,000).

IT’S EVEN MORE FINANCIALLY ADVANTAGEOUS TO CUSTOMERS IN LOWER TAX BRACKETS

This economic benefit to a homeowner in a lower tax bracket is even greater.  Assume an owner is in the 15% bracket.  This means for every $1 of taxable income $00.15 of tax liability is created.  The net effect of a $1,500 tax credit to someone in the 15% bracket is the same as being able to deduct $10,000 off of their taxable income because to create $1,500 of tax liability, that person has to have $10,000 of taxable income.  The owner can, in essence, pay up to $10,000 for a new furnace and tankless water heater and still break-even.

To someone in a 10% tax bracket, the equivalent taxable income reduction is equivalent to being able to deduct $15,000 off of the taxable income ($15,000 taxable income x 10% bracket = $1,500 of taxes owed).

FAQ’s (taken off of IRS website)