small debt but want to use Fed Tax Credit

[m.f.walters]

What would you guys do? We have about $5000 left on our credit card debt/small used car loan balances. We are on track to have cc debt paid off by April, 2011, and car loan in the fall of 2011. However, we have an opportunity to replace an oil fired hot water heater with a rinnai high-efficiency on demand unit that will qualify for the Federal energy tax credit. Plus in state of NH there is an additional rebate available on the same unit. So we would get $300 back from the state and a $950 credit on our taxes. The amount of the credit/rebate is 39% of the total cost of the project. We live in an antique home with high oil bills for heat/hot water and the new unit would be propane fueled.
So, would you temporarily stop debt repayment, and take some money out of savings to pay for the project, so that you could save $1200 ( and about $500 a year on oil bills)? Or would you not do the project until you are out of debt and have saved up the 6 months emergency fund and then enough extra to pay for the project outright? and by then all the rebates/tax credits will have expired.
Calculated the pay back on saved energy bills would be about 3 years on the conservative side.
fyi-our income more than covers our expenses, own our own business for 20+ years so income is stable.

[littleroc02us]

So, how much will the Rinnai high-efficiency cost?

[Hector]

I would pay debt first. Would establish emergency fund after that and then would think about expense.

[ea1776]

i'd zap the debt first.

[m.f.walters]

The total cost of installation and product is $3237, just the hot water heater is $1250. The federal tax credit lets you take 30% of equipment and installation up to $1500, so for us it would be $971. Since we're installing the new equipment to run off propane (that we have currently in a new addition to the house) there's some extra installation expense related to running the new pipes and venting, plus removal of the old tank.

[m.f.walters]

oh, and we always get a tax refund so we'd get the $971 plus the $300 rebate in April. Then we could apply that back to debt and not be too far off our scheduled payoff dates. And yes, I know we shouldn't always get a tax refund, but because we're self employed, sub s corp, all p&l from the business flows thru to our personal tax return. I don't like the potential for big swings in our tax situation depending on how our (restuarant) business fares, so we always shoot for a cushion.

[Joan.of.the.Arch]

Unless the interest rate on your debt is ungodly high, I would for sure get the new unit before the end of the year to get the rebates and credits. Three years is a fine payback time.

[red92s]

Since Rinnai is based here in Atlanta, and we desperately need economic growth, I'll vote for the water heater.

[ea1776]

Originally Posted by m.f.walters

oh, and we always get a tax refund

You may want to consider adjusting your federal withholding so your tax bill at the end of the year is $0.00, either way. As a reminder, tax planning is one of the most important aspects of managing your personal finances (the obvious goal being to avoid giving Uncle Sam any additional money/interest, by taking advantage of various tax incentives, keeping your tax bracket as low as possible, and not giving Him any additional income). Instead of getting that refund, you could be applying the extra cash to your debt, thereby "earning interest" by avoiding paying additional interest.

The U.S. Treasury does not equal a savings account.

[littleroc02us]

Originally Posted by m.f.walters

The total cost of installation and product is $3237, just the hot water heater is $1250. The federal tax credit lets you take 30% of equipment and installation up to $1500, so for us it would be $971. Since we're installing the new equipment to run off propane (that we have currently in a new addition to the house) there's some extra installation expense related to running the new pipes and venting, plus removal of the old tank.

Next question, "Is this an emergency situation or just a want to get a tax rebate/credit and a new furnace?"

[m.f.walters]

hi again, thanks for the input. it's the water heater, not the furnace....but the water heater we have isn't particularly energy efficient as it runs off an oil fired boiler. In the summer when we aren't using the furnace at all, the boiler still has to turn on to keep 40 gallons of water hot all the time. And we only use this water heater for 2 bathrooms, none of the other household hot water uses. So we thought that the tax credits would be an opportune time to change out the inefficient water heater for an on-demand. especially as one child has left the nest and the other has another 9 months or so, and then it's just my husband and myself and our showers.
But.....all that said, you guys have talked us out of it. It's a pattern for us- getting our savings to a certain point and then getting the spendies. So we've decided to "take a cold shower" as my dad used to say, and not spend the money. Thanks for all the advice!

[m.f.walters]

Originally Posted by red92s

Since Rinnai is based here in Atlanta, and we desperately need economic growth, I'll vote for the water heater.

Sorry red92S-I've decided against. but I do have family in Atlanta so I'll tell them to get to spending!