Tax Credits for Solar Energy

Drawing free power from the sun instead of paying for electricity sounds appealing, but it will cost you money to install any sort of solar-energy collectors in your home. To encourage the use of solar energy, the federal government offers tax credits to offset the cost of adding solar power to your house.

Function

• Solar energy normally doesn't do anything when it reaches Earth except heat and illuminate what it strikes, "Scientific American" states. Solar power panels and other collectors are covered with crystals or compounds that absorb the light and transform it into electricity that can be used immediately or stored in a battery.

Benefits

• The advantage of having solar power in your house is that once you install the equipment to collect solar energy, the energy itself is free. From an environmental standpoint, solar energy is renewable--it won't run out for millions of years--and doesn't pollute. It can be used for any purpose, from powering your lights to heating your bath.

Size

• If you install a home solar energy system, the Department of Energy states, you can take 30 percent of the cost off your taxes. This is a tax credit, not a tax deduction: Instead of taking the money off your taxable income, you take it off your actual tax payment. If the system cost $7,000, for instance, 30 percent would be $2,100, so you could take that much off your tax bill. This offer holds for systems that are installed any time before the end of 2016, and also covers geothermal heat pumps and small wind systems. It applies to new homes and existing homes, principal residences and vacation homes, but not rentals.

Geography

• The U.S. Department of Energy maintains a web page with links to renewable energy tax credits and grants from the various states. In North Carolina, for instance, corporations can take 35 percent of the cost of installing solar systems as a tax credit, up to a maximum of $2.5 million.

Considerations

• To claim your credit, you must file IRS form 5695 with your tax return for the year you install the system. The Department of Energy recommends you save receipts and the Manufacturer's Certification Statement for your tax records.