Do you know the difference between a tax credit and a tax deduction? I have been surprised at how many people do not, and it prompted me to write this 3rd column on the recently enacted Stimulus Plan as it relates to high efficiency heating and cooling equipment by the Federal Government and the rebates and incentives offered by some manufacturers, distributors and dealers, that may accompany it.

     So many in fact, that I have found quite a few who are not only confused, but in some instances have been misled by contractors (and others), who also do not know (or care) about the difference. If you are in any of these categories, it could cost you a lot of money! Let me try to explain the difference and why it could mean lots of $$$$ to you.

     Definitions and examples:

          •  A tax deduction applies against a taxpayer's income.

          •  A tax credit applies against a taxpayer’s liability.

     A tax deduction lowers the adjusted gross income that you pay tax on (not the actual tax you pay). This possibly moves the taxpayer to a lower tax bracket, similar to the way home mortgages and charitable giving, reduces the total amount you pay taxes on. It lowers the total amount of your taxable income…not the amount of taxes you pay.

     For example, a $1,500 tax deduction for someone in the 25 percent tax bracket would lower taxes owed by $375.

     A tax credit on the other hand, reduces the actual taxes you pay, (not the amount you pay tax on) 100% (dollar-for-dollar) of the amount of the credit. A $1,500 tax credit for energy efficiency efforts i.e., will lower taxes owed by $1,500!

     Summary: A tax credit comes off the actual taxes owed instead of just reducing your taxable income. That’s why a tax credit is more valuable than a similar tax deduction.

     Now let’s try to apply what we’ve learned to the new Stimulus law:

     Tax credits of 30% up to $1,500* are available on specific high efficiency furnaces and air conditioners installed in 2009 & 2010 in existing homes.

     In other words, a $5000 qualifying comfort system will realize a net cost (after the tax credit) of $3500. And best of all, systems that meet the tax credit efficiencies can also qualify for local utility rebates and in some cases manufacturer rebates to reduce the cost even further if they are available.

     I.e., in addition to the Federal tax incentives, several of our suppliers offer related rebates. 2 of the manufacturers we represent have product rebates that range from $1000-$1200.

     Also, the local utility (VNG) has various rebates up to $1025.

     Because these are a very unique, narrow and specific group of credits,” a lot of people who qualify, are likely to miss out on this once in a lifetime opportunity to substantially reduce their annual energy costs by upgrading their HVAC systems, so once again, let’s briefly review, who and why you should consider an upgrade.

     Advances in technology over the last ten years mean that today’s higher efficiency HVAC equipment:

     Here’s just one example of advanced technology and one of the easiest ways to explain the benefits and logical reasoning for upgrading equipment:

     A multi-stage furnace or air conditioner can be compared to a car. It gives you many levels of heating or cooling (low, medium, high) similar to 20 mph, 40 mph and 60 mph in your car.

     A single stage furnace or air conditioner i.e., only gives you 60 mph all the time, even when the temperature is just a few degrees different from the outside and you only need a little cooling or heat to reach your thermostat setting. Single stage equipment wastes enormous amounts of energy and leaves your home uncomfortable whenever low and medium amounts of conditioned air are necessary (approx 90% of the time).

     Multi-stage equipment uses far less energy with longer run times which in turn, leads to increased comfort in all areas of your home.

     You would never drive your car in city traffic at 60 mph and slam on your brakes and then back to 60 and so on, so don’t settle for single stage HVAC equipment when it is time to upgrade.

     • You benefit 3 ways:

     Don’t miss out on the new tax credits for energy-efficient heating and cooling upgrades in 2009. Combined with incentives from manufacturers and your utility company, there has never been a better time to install or replace your home’s heating and cooling equipment. Take advantage of: