Solar Tax Credit



Solar energy is a clean, renewable energy source. The production of solar energy on residential and commercial structures creates no pollutants and is starting to make serious financial sense. In 35 states, the concept of net metering is now an established fact. Net metering simply means you can sell energy from solar panel systems back to utilities, thus eliminating or seriously reducing utility bills. As oil and natural gas costs skyrocket, the Federal Government is doing even more to promote the use of solar energy.

In 2005, Congress enacted the Energy Policy Act. As part of the act, a tax credit was established for any person purchasing and installing residential solar energy systems for electric and water heating purposes. If you purchase and install solar systems for either of these purposes, you can take a 30 percent tax credit. If you install systems for both of these purposes you can double the tax credit. To avoid tax abuse, each tax credit has a cap of $2,000.

Importantly, tax credits are far more valuable than tax deductions. Tax deductions are taken from your gross income prior to figuring the amount of tax owed. Tax credits are a dollar for dollar reduction of the actual amount of tax you owe. For instance, if you prepare your tax returns and find you owe $5,000 to the IRS, a tax credit would be deducted from this $5,000 figure. In short, a tax credit gives you a lot more bang for your buck.

To claim the solar tax credit, there are a few restrictions and requirements. First, you can't claim the tax credit if you use the solar system to heat a hot tub or pool. Second, the system must be certified by a solar rating certification corporation to establish that you, in fact, installed a working system. Third, the system must be activated between January 1, 2005 and the end of 2007. Finally, you cannot claim the credit if the government gave you a grant or financing to purchase the system, to wit, no double dipping.

When solar energy is discussed as a potential alternative energy source, most supporters point to the environmental benefits. Ultimately, the benefits to ones bank account will really make the difference and the solar tax credit is a solid step in that direction.