Making your home green can save you some green

Sometimes, it just makes sense to spend a little money now so you can save down the road. You fork over $15 for one of the coupon books your kid's school sells because the deals could potentially save you hundreds over the next year. You hit the March and April sales to get a deal on a winter coat, even though you won't wear it for at least six months. And you lay out the cash to make your home more energy-efficient because it will save money on utilities.

That last decision -- one of the hardest ones to make because it often involves spending a sizable chunk of money -- has been made easier by the American Recovery and Reinvestment Act.

The act, signed by President Barack Obama in February, lays out new tax credits for green homeowners. Simple changes like adding insulation to your home and purchasing energy-efficient appliances could significantly reduce your tax bill come April 15.

Before you rush to your local home improvement store, though, read on. This guide will help you get the most from the credit, without having to drop unnecessary cash.

• Play by the rules. We saw a similar tax credit in 2007, but this year's is a bit different. You can receive a credit of 30 percent of the cost of all qualifying improvements that are utilized in 2009 and 2010, up to a maximum of $1,500. "The best way to make sure your purchase is eligible is to contact the manufacturer and ask for a manufacturer's certification statement," says Karen Schneider, IT Manager for Energy Star. In many cases, the purchase must be for your principal residence, and you should save your receipts -- along with the copy of the manufacturer's certification statement -- in case you're audited. Examples of qualified purchases include insulation, windows, doors and skylights, central air-conditioning units, water heaters and heat pumps.

Read carefully to see if the 30 percent applies only to materials, not labor. "It's a huge misnomer for people. They get a contract for doing windows. They're expecting to get the tax credit, but then they're surprised because according to the rules, only the product material costs are credited. Of the $5,000 you spent on windows, half is labor. You don't get credit for the labor," said Charlie Szoradi, president and founder of GREENandSAVE, a green home and office remodeling resource. Visit http://energystar.gov/taxcredits for a quick guide to when labor is included in the credit and when it's not.

• Start by replacing what's costing you the most. One of the biggest cost savings comes from upgrading your insulation, says Schneider. Having the proper insulation and sealing in a home can shave about 20 percent off your heating and cooling costs each year.

If your water heater fails at the right time, and you can catch a tax credit for replacing it with an energy-efficient version, great. But replacing items that don't need replacing is neither cost-effective nor eco-friendly.

A high-performance showerhead, for example, costs about $30 or $40, and can save you more money than installing $3,000 worth of solar panels, says Szoradi. "When you reduce the water flow from 2.5 gallons a minute to 1.6 gallons, it feels like the same pressure. But if you run a 10-minute shower, you've drained half the hot water tank. It costs $300 to $400 a year to heat the water in your house."

Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today" show. Her Web site is http://www.jeanchatzky.com.