Deductions and Credits

• The Internal Revenue Service (IRS) and each state's department of revenue offer various deductions and credits that lower a taxpayer's tax liability in different ways. Deductions lower a taxpayer's taxable income. In other words, a taxpayer who earns $40,000 in 2010 and has $5,000 in deductions gets to lower her taxable income to $35,000, which means she is only taxed on the lower $35,000, saving her about $1,250 if she is single. Credits reduce a taxpayer's actual tax liability. If the same single taxpayer earned $40,000 in 2010, and she had $6,000 withheld, her total tax liability before deductions would be $6,188, and she would owe the IRS $188 at tax time. Supposing she qualifies for a $5,000 credit, her tax liability is reduced to $1,188, meaning she would get $4,812 of her withheld income back as a refund.
  
  

Residential Energy Credit

• The residential energy credit is a credit, not a deduction, so it directly decreases any tax balance due or increases a tax refund. The credit amount is equal to 30 percent of the cost of all qualified energy improvements made in 2009 or 2010 with a maximum combined credit amount of $1,500. Qualified improvements include adding insulation, installing energy efficient doors and windows and installing energy efficient heating and air conditioning systems. Taxpayers can only claim this credit for improvements to their main residence. Alternate credits and deductions are available to business owners and landlords.
  
  

Claiming the Credit

• If you have not yet filed your 2009 or 2010 tax return and made qualified improvements to your home in those years, you should add form 5695 to your tax return. This form allows homeowners to claim the residential energy credit on their 2009 or 2010 tax return. If you have already filed and did not claim your credit, you may file an amended return using the form 1040X. You will also need to fill out form 5695 and include that along with your amended return. You may only receive up to $1,500 total in residential energy credit money over the two-year period.
  
  

Arizona Credits

• Arizona does not have any specific credits or deductions that deal with double-pane, energy-efficient windows; however, you may receive the residential energy credit on your federal return. Arizona does have other energy efficient credits; however. Arizona offers nonrefundable credits on solar energy devices, solar hot water heaters and electric vehicles. Nonrefundable credits can reduce your tax liability down to zero, but you are not allowed to take any excess nonrefundable credits as a refund.