While many people have heard of the energy efficiency tax credits, few of us actually understand how they work and which efficiency upgrades actually qualify for the program. For those of you who are considering taking advantage of the federal tax credits, this should help clear up some of the confusion.

How it Works

The way the program works, consumers can earn tax credits for each of several different renewable home energy systems they install or energy-efficient products they buy and put into use. You might be familiar with the Energy Star logo that appears on appliances designated as being energy-saving. These products will help you save money on your home energy bills over the life of the appliance.

In addition to the regular savings you will enjoy by replacing old inefficient appliances, many of these items also qualify for a federal tax credit as well to help offset the cost of the purchase. While not all Energy Star appliances will qualify for a tax benefit, many of them do and can lead to a significant savings on your home energy bills month after month.

Tip: If you don't qualify for the program offered by Uncle Sam, check with your state and your local utility company as well. There are many hidden areas where making efficient home upgrades can earn rebates or deductions.

Here are some of the major items that you can upgrade and potentially be eligible for a tax savings:

1. Energy Efficient Doors and Windows - This credit will cover up to 30% of the cost of replacing doors and windows up to a $1,500 maximum excluding the cost of installation. It applies to your primary residence only which means that it cannot be taken on vacation, investment, or rental properties.

2. Insulation - Adding more insulation to your home is one of the most energy-saving upgrades you can make. Bulk insulation as well as weather stripping, house wrap, and caulk can all qualify for this credit as long as they come with a manufacturer certification that they help to prevent air leaks. As with the energy-efficient windows and doors program, this will cover up to 30% of the cost (not including installation) up to a maximum of $1,500.

3. Non-Solar Water Heaters - Did you know that your water heater alone can account for as much as 25% of your total home energy use? If so, this is one area where you can potentially realize a considerable amount of savings by upgrading to a more energy-efficient model. To qualify for this one, the water heater you buy must carry a thermal efficiency rating of at least 90%. This program will also cover 30% of the cost up to $1,500 excluding any installation costs.

4. Solar Energy Systems - To qualify for the solar energy systems tax credit, a minimum of half of the total energy use by the home must come from the sun. It applies to solar water heaters and solar panels as well. Unlike the other energy tax credits discussed so far, this one does include installation costs as well as the cost of the system. The program covers 30% of the total cost with no upper limit.

Ready to file your return this year? You can file your federal income taxes online this year and get your refund in as little as 8 days! Just use this guide along with one of the popular tax preparation software programs and watch your savings start to add up.