We should be skeptical of buying anything for which government provides a particular inducement. These include tax credits or deductions, especially temporary ones. Many who took solar and wind energy credits in the 1980s ended up with sizeable financial losses because their equipment didn't produce enough income to cover the cost, despite the sizeable tax savings from the credits.

By the time such credits are announced whatever problem the government is trying to fix is often well on its way to being resolved by market forces. Oil prices collapsed from their highs of last year, while housing prices were plummeting until the government intervened.

By artificially propping up demand, tax credits, subsidies and deductions allow manufacturers to hike prices or delay dropping them. Such schemes also cause a misallocation of resources by encouraging over-production of some goods. If you rush out now and buy a new car or energy-saving device, your price net of tax savings might be higher than the price without any tax savings after the credits, etc. disappear. With this caveat, the new credits and deductions related to energy, housing and rental properties include:

1. First-time homebuyers' credit. The credit is 10% of the price of a primary residence for those who have not owned one for the last three years, with an $8,000 cap. It's a refundable credit, which means it's treated as if the money had been withheld (even if your tax liability is zero, you get it "refunded"). It applies to a single-family residence, the owner's share of a duplex (or even larger building), condominium, mobile home and even a boat if that's your main home. In the case of multiple buyers the credit can be allocated among qualifying owners in whatever way they agree.

The credit is, under current law, available only for purchases completed by November 30, 2009. However, beware: the credit is phased out at a rate of $4 for every $10 in additional income for those with Adjusted Gross Incomes of $75,000 to $95,000 ($150,000 to $170,000 for married taxpayers), which creates a potential 86% marginal tax bracket for those with income in those ranges (28% federal, 9.55% CA state, 7.65% Social Security, 1.1% SDI and 40% phase-out of the credit). On the other hand, an election can be made to claim the credit on the 2008 tax return on either an originally-filed or amended return, which may be crucial for those with income exceeding the thresholds in 2009. The credit must be paid back if the home ceases to be one's principal residence within the three-year period following the purchase.

While the caveats mentioned above apply, I'm not completely averse to taking advantage of the credit if prospective rent (factoring in the fact that rents in many areas are plummeting) on an identical home exceeds the total cost of ownership (including interest, tax, maintenance, insurance, amortized cost of replacing systems and opportunity cost of the down payment).

Many areas of the country that didn't experience bubble prices, as well as bubble areas that have already collapsed 70% (for example, some areas of the Antelope Valley, lower deserts, Central Valley and Inland Empire in California), may already be at or near this price-point. While an $8,000 slice off of already low prices could be worth looking at, a 2% effective reduction in price off a $400,000 home ($8,000 maximum credit divided by $400,000 = 2%), or even 4% off of a $200,000 price ($8,000/$200,000 = 4%) could easily be wiped out by an insignificant drop in values.

2. A deduction for sales tax (or, in states without a sales tax, "fees or taxes that are based on the vehicle's sales price or as a per unit fee") on up to $49,500 of the cost of a new vehicle for purchases made February 17 through December 31, 2009. This is available to those who don't itemize and is in addition to any itemized deduction for other sales tax or state income tax. Interestingly, while the cap per vehicle is the tax on up to $49,500, there is no cap on the number of qualifying new vehicles.

Beware: the deduction phases out when "Modified" Adjusted Gross Income (MAGI) exceeds $125,000 ($250,000 married) and disappears completely at MAGI of $135,000 ($260,000), creating yet another phantom tax bracket of as high as 15% per vehicle purchased (depending on the sales tax deduction and nominal marginal tax bracket). Also note that someone in a 33% marginal tax bracket will save at most only 3.3% off the price of a vehicle (33% of a 10% sales tax is 3.3%), which is less than the drop experienced as you drive your brand new vehicle off the new car lot.

3. A 30% credit for qualified energy efficient property installed in an existing main home. Eligible property includes insulation and qualifying energy-efficient exterior windows and doors, non-solar hot water heaters, roofs and HVAC (heating, ventilating and air conditioning) systems. The maximum credit is limited to $1,500 for such improvements placed in service in 2009 and 2010. Since the tax savings may be a substantial percentage of the total cost and contractors are experiencing some rather lean times, this may be an ok time to update those windows, doors, insulation and, perhaps, even HVAC.

4. A 30% credit for qualified residential alternative energy equipment, which includes photovoltaic systems (i.e., solar panels), solar hot water heaters (but not for pools), geothermal heat pumps and wind turbines placed in service before the end of 2016 in a dwelling unit used as the taxpayer's home or second home. To complicate matters, it's also available for fuel cells, but only for those installed in a main home. None of these credits apply to rental or commercial-use property. Even with the 30% credit, this remains a questionable overall value.

One authority calculates a break-even period of at least a dozen years, which means while you may see your investment returned in that time frame, you still won't have a return on your investment. And we really don't have any history to help us determine whether there is much resale value. Even kitchens and baths are said to return at most 80% on a resale.

5. 50% "bonus" depreciation is allowed on purchases of new qualified property that is (generally) placed into service by December 31, 2009. While irrelevant for most small businesses due to the current Section 179 expense allowance (under which most equipment can be deducted in the year of purchase whether new or used), it is very helpful for owners of rental property, who may take the bonus amount on such items as new free-standing appliances, carpeting and land improvements (such as new driveways, walkways and landscaping), as well as qualified leasehold improvements. Although non-leasehold improvements affixed to the real property must be depreciated over 27.5 years (39 years for commercial buildings), this might be the year to invest in those "other" items.

Bonus depreciation is also helpful for business owners purchasing new vehicles, although it's limited to $8,000 and many see a larger tax savings over several years by taking the standard mileage rate in the first year in lieu of depreciation (my tendency), which allows one to elect either the standard rate or actual costs in future years. (The selection of bonus or any other accelerated method of depreciation in the first year precludes one from taking the standard mileage rate in all future years.)

6. A new version of the old "Hope" education credit, now called the "American Opportunity Tax Credit." It has been increased in size, can be partially refundable (treated like withholding) and is phased out rather than "cliffed" out (as is still true for the Higher Education Tax Deduction). The maximum credit is 100% of the first $2,000 of qualified tuition, fees and related expenses for each of the first four years of post-secondary education in a degree or certificate program, and 25% of the next $2,000 of such educational costs, for a total maximum credit of $2,500, per eligible student. "Related expenses" now include course materials such as books.

Up to 40% of the otherwise allowable credit is refundable (if your tax is otherwise zero, $1,000 in qualifying education expenses will generate a $400 refund) and the credit is phased out between "Modified" Adjusted Gross Income (MAGI) of $80,000 and $90,000 ($160,000 and $180,000 for joint filers). I suggested in a series of articles published in 1993 that education intended to produce taxable income should be in some way deductible, even if it's not "continuing" education (for which deductions have long been allowable). Congress first saw the wisdom of this idea in 1998 and the value of the credits or deductions have, in general, done nothing but increase ever since. Rarely does Congress do anything worthy of accolade. This is one of those rare moments. Let us cherish it.

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