If you are thinking about installing a new renewable energy system in your home, such as one that uses solar energy, fuel cells, wind power, or geothermal energy, the good news is that Uncle Sam will underwrite a good portion of the cost of buying and installing the new system. This is done through an income tax credit called the Residential Energy Efficient Property Credit. Here are the details:
Individuals are allowed a personal tax credit equal to 30% of expenses paid for qualified:
- Solar energy property — property that uses solar power to generate electricity in a home;
- Solar water heating property — property that uses solar power to heat water in a home;
- Fuel cell property — property that turns fuel into electricity by electrochemical means;
- Small wind energy property — property that uses a wind turbine to generate electricity in a home; and
- Geothermal heat pump property — property that uses the ground or ground water as a thermal energy source to heat or cool a home.
These are generally high-ticket items. For example, a solar electric system for your home may cost around $20,000. If qualified, the credit would be 30% of $20,000, or $6,000. In addition to the federal tax credit, many state and local governments and public utilities also offer incentives, such as rebates and tax credits, for investment in renewable energy property. In deciding whether to make the purchase, you should consider the available incentives and your cost savings in operating the system.
To qualify for the credit, the equipment must be installed in a home that is located in the U.S. and that you use as your residence. For fuel cell property, the home must be your main residence. For the other types of property, it can be any residence of yours in the U.S., not just the main one.
The credit can’t be claimed for equipment that is used to heat a swimming pool or hot tub. If the equipment is used more than 20% for business purposes, only the expenses allocable to non-business use qualify for the credit.
Each type of equipment must meet energy-efficiency requirements. You can rely on a manufacturer’s certification that a component meets those requirements. You don’t have to attach the certificate to your return, but you should keep it with your tax records.
The credit covers both the cost of the hardware and the expenses of installing it. You can claim the credit for labor costs of on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home.
You claim the credit in the year in which the installation is completed. If you install the equipment in a newly constructed or reconstructed home, you claim the credit when you move in.
The credit for fuel cell property is limited to $500 for each 0.5 kilowatt (kw) of capacity. Other than that, no dollar limit applies to the credit. What’s more, there’s no phase-out of the credit based on income, so you can claim it no matter how much income you had for the year.
The credit is allowed against both regular income tax liability and alternative minimum tax (AMT). If the credit exceeds your tax liability, you can carry over the excess to the next tax year.
If you are thinking about installing a new renewable energy system in your home, you may want to consider a discussion with your tax advisor about the tax benefits relative to your specific situation and a cost/benefit analysis.