federal incentives for Solar Energy

The American Recovery and Reinvestment Act of 2009 extended many consumer tax incentives originally introduced in the Energy Policy Act of 2005 (EPACT) and amended in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).  This legislation not only extended the tax credits but improved upon them in a number of significant ways.  The most important change as regards solar energy systems is that it eliminated the fixed $2000 cap and allows a homeowner to take a full 30% of the cost of the system off of their taxes.  This means that a homeowner can now put in a big enough solar PV system to cover 100% of their energy needs and then take a 30% tax credit. The exact dollar amount will depend upon your tax bracket but for most homeowners this means the credit will usually be in the $5000 to $15,000 range, a major improvement from the prior $2000 cap.

It is important to understand that the legislation provides a tax credit as opposed to just a tax deduction.  A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces taxes dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. For example, if you put in a $30,000 solar PV system the 30% tax credit would come to $9000.  If you owed $25,000 in federal taxes you could reduce the amount to $16,000.  Its good money!

The extended tax credits are fairly broad in scope and don't just apply to PV systems.  Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.

There are some requirements for claiming these tax credits. The tax credits for solar water heating strictly apply to home hot water heating systems. They cannot be used to pay for solar systems to heat swimming pools or hot tubs.  If you want to get tax credit on a solar hot water heating system you must select a system which is certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. This requirement is intended to ensure that homeowners don't get taken by some of the shady operators that suddenly entered the market after the original Carter administration tax incentives became available.

The size of the tax credit is calculated based on the individual’s expenditures and excludes subsidized energy financing, which is defined as "financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy."

The details of the tax credits can be complicated and you should consult with a tax professional regarding how to calculate the potential tax savings before proceeding with any work. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. Expenditures include labor costs for the onsite preparation, assembly, or original installation of the system and for piping or wiring to interconnect the system to the dwelling.