Your own solar water heater

Solar panels seem to be an excellent way to generate less costly electrical power. They seem a good way to heat water,as well as the air inside homes.

Solar panels and the IRS should be friends, since the government purports to be seeking alternative energy sources. The U.S. government should give tax credit to those who invest in solar panels. But does it?

The value of solar panels in the IRS' eyes is shown in the Energy Policy Act of 2005 for Individuals. In 2006, inflation adjustment figures were given, but the act remains basically the same.

Energy Policy Act of 2005 for Individuals (EPACT) - Summary

Individuals can make energy-conscious purchases, and receive tax benefits for doing so. The law provides tax credits for making your principal residence, which must be in the U.S., more energy efficient. It also gives tax credits for buying specified energy-efficient items, including alternative motor vehicles such as hybrids.

Solar panels, says IRS, will earn tax credits if they are on your main home, and that home is in the U.S.

Most of EPACT remains in effect throughout 2007. Many think it will be renewed or expanded in 2008.

Detail Regarding Solar Panel Tax Credits

The Energy Policy Act of 2005 makes a tax credit available to those who add qualified solar panels to their homes in the U.S. The IRS allows one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum $2,000 credit. The IRS also allows an equal credit for investing in a solar water heating system. You could credit of up to $4,000, $2,000 for solar panels, and $2,000 for solar water heating.

Whether you add solar panels or a solar water heating system, you cannot use any part of it to heat a hot tub or swimming pool.

Solar panels, for IRS tax credit qualification, must be placed in service between December 31, 2005 and January 1, 2008.

State Rebates or Tax Incentives and the IRS

You may find that your solar panels are eligible for state rebates or tax incentives. Your state’s energy office website may have more information on that. If your state or utility does give incentives for installing solar panels, the IRS tax credit applies to the basis remaining after you have taken state incentives.

Example: Your $10,000 solar panel array receives $5,000 in state tax incentives. It would then be eligible for a credit equal to 30 percent of $5,000. Your Federal IRS tax credit would be $1,500.

To locate any tax incentives your state may offer, simply search on the state name with the words solar incentive, without quotation marks.

Wouldn't a Tax Deduction Be Better than a Tax Credit?

Normally speaking, a tax deduction is less valuable to you than the same amount of tax credit. A tax deduction takes away a percentage of the tax you owe the IRS. But a tax credit reduces your tax, dollar-for-dollar.

Solar Panels absent IRS Credits

Even if EPACT had not been signed into law, and the IRS offered no tax credits, solar panel installation could still be a wise investment. Many find that a solar panel array pays for itself within 3 to 4 years. They then save money on electricity for many years with little maintenance.

So, while tax credits are welcome, you may still want to do more research into the potential savings of solar panels.

Disclaimer: Please note that the author is not a tax professional and cannot offer you tax advice. The information above is for educational purposes only.

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