For those who are interested in obtaining solar power for their residence, the most popular incentive is the solar tax credit that will help lower the cost of installation. For many, the tax credit has proven to be quite popular when it comes to considering solar power for the home. The 30% credit is a considerable one that has many people looking into the tax credit for their energy needs.
Solar power has been around for decades, but recent advances in technology have make it a more practical solution for residences thanks to the reduction of size and weight of the solar panels while still providing plenty of power. Understanding the tax credit itself and how it can be applied is an important step towards claiming it on your tax form if you should decide to go solar.
Solar Tax Credit
First established by the 2005 Energy Policy Act, this tax credit applied to photovoltaic, water heating and fuel cell systems. However, the credit was extended to geothermal heat pumps and small wind-energy systems thanks to the 2008 Energy Improvement and Extension Act. There are a number of revisions that has happened to the legislation over the years, including the following;
- Using the credit against the alternative minimum tax
- Removing the $2,000 credit limit for solar electrical systems
- Removal of the maximum credit amount for all applicable technologies, save for fuel cells
- Extending the Act until the end of 2016
The extension of the Act has allowed even more home owners to take advantage of what it can provide in terms of tax relief for installing a solar panel system. However, just how does the tax credit work for those interested in adding a solar energy source to their residences?
Federal Tax Credit for Solar Energy – TurboTax Tax Tip
How the Tax Credit Works for You
The taxpayer can claim the 30% credit if they pay for one of the qualified expenditures that is covered under the Act. The purchase must meet the minimum criteria and must service a dwelling that is located in the United States and owned by the taxpayer. The expenditure in and of itself must be made with respect to the equipment that is purchased and is considered completed when the installation is finished for the purposes of claiming the tax credit. For example, if you purchased the eligible equipment in December but the installation was not completed until January. Then the tax credit will kick in for January or the following year on your tax form.
If the installation is part of the construction of a new home, then the date for tax purposes is considered the first day the home is occupied. The actual expenditure itself can include the labor cost for on-site preparation, assembly or original installation and the connecting of wiring and piping depending on the circumstances. It the credit exceeds the liability in terms of the taxes then the excess may be carried over until the following year. However, it is not clear if it can be carried over after the end of 2016 unless the Act is extended once again.
The maximum allowable solar tax credit will depend on a number of factors which include, but are not limited to the following systems.
Photovoltaic Systems (PV)
For this service, there is no maximum credit amount for services which can be placed from now until the end of 2016. It is interesting to note that the home which receives this service does not have to be the primary residence of the taxpayer. This means that vacation homes may qualify for this tax break assuming that it is owned by a qualified taxpayer.
Like the photovoltaic systems, there is no maximum credit for systems put into place until the end of 2016. However, there are the following guidelines;
- Must qualify for Solar Rating Certification Corporation or similarly approved entity
- At least 50% of the energy used to heat the water must come from the solar source
- Does not apply to hot tubs and swimming pools
- Does not have to be taxpayer’s primary residence
All of these conditions must be checked and verified in order to properly claim the tax credit. However, it must be noted that if the hot tub or swimming pool is only part of what the solar-water heater services, then the credit may apply in full depending on what else is attached.
Here, the maximum credit is $500 per ½ KW of power and there are other requirements as well;
- Must meet minimum capacity of 0.5kW of electricity that uses an electricity only or electrochemical process of greater than 30% efficiency for generation purposes
- Joint occupancy limits the maximum capacity for qualifying costs to $1,667 per 0.5kW. However, this does not apply to those who are married filing a join return. Each individual may make a claim in this regard.
- Home must be the taxpayer’s primary residence.
Geothermal Heat Pumps
Here, there is no maximum credit for any of these systems if they are in place before the end of 2016. In addition, the pumps must meet the criteria set forth by the federal Energy Star credit. Plus, the home does not have to be the taxpayer’s primary residence. It must be noted that geothermal energy is dependent on underground sources to be present in order for the energy itself to be used.
Small Wind Energy
There is no maximum credit for any systems that are put into place until the end of 2016 and the home itself does not have to be the primary residence of the taxpayer.
Overall, adding the advantages of going solar with one or more of these energy systems will offer the taxpayer a 30% discount that can be used to offset the cost of installation.
It is not known if the tax credit will be extended beyond 2016 or if new legislation will be introduced to replace it. However, it is fair to say that the solar tax credit has made a substantial impact in terms of more people having such systems installed in their homes.