Solar-Energy Credit Basics

• According to ENERGY STAR, a program created by the U.S. Department of Energy and the Environmental Protection Agency, the government offers tax credits for solar panels and solar water heaters in the amount of 30 percent of the price of the system. There is no upper limit on the tax credit, so you can take a credit of 30 percent even if you spend tens of thousands of dollars on a solar system. The tax credit remains in effect until December 31, 2016.
  
  

Qualifying Residences

• Many of the tax credits the government offers for energy-efficient home upgrades only apply to principal residences that have already been built. Solar-energy credits apply to both principal residences and second homes, and can be taken on both existing residences and new construction. The credit cannot, however, be taken on solar upgrades made to rental properties.
  
  

Eligibility Requirements

• Installed solar systems must meet certain eligibility requirements to qualify for tax credits on personal income tax returns. Solar water heaters must generate at least half of the energy necessary to heat water from the sun to qualify for credits. Moreover, the system must be certified by the Solar Rating and Certification Corporation or a similar organization approved by your state's government. Solar-paneling systems must provide energy for the residence itself and adhere to fire and electrical codes.
  
  

Impact on Taxes

• The tax impact of a tax credit is a direct reduction in tax liability. If you owe $5,000 in federal income taxes during the year but installed a $10,000 solar-panel system that qualifies for a tax credit, the $3,000 credit would reduce the tax you owe to $2,000. A tax credit can result in a significant tax refund when you file your income tax return.