Let the sun shine in on this tax credit

If you are considering upgrades to your home, you may want to consider installing renewable energy systems. They are not only more efficient, which will help you save on energy bills, but they could be worth a significant tax credit as well.

The federal government is offering a 30-percent personal income tax credit – called the residential energy efficient property credit – for a portion of the cost of buying and installing systems that use solar energy, fuel cells, wind power or geothermal energy.

The up-front cost of this equipment can be high. For example, a solar electric system for your home may cost around $20,000. However, if qualified, the federal tax credit would be 30 percent 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.

Individuals are allowed a personal tax credit equal to 30 percent of expenses paid for qualified:

  • Solar energy property: Property that uses solar power to generate electricity in a home (although, the solar energy credit is subject to a phaseout. More on this below);
  • 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.

The 30 percent energy credit continues to apply to solar energy property, the construction of which begins on or before Dec. 31, 2019. However, the solar energy credit is expected to phase out based on the following:

  • For solar energy property, the construction of which begins after Dec. 31, 2019, and before Jan. 1, 2021, the energy credit is 26 percent;
  • For solar energy property, the construction of which begins after Dec. 31, 2020, and before Jan. 1, 2022, the energy credit is 22 percent; and
  • For solar energy property that is under construction before Jan. 1, 2022, but is not placed in service before Jan. 1, 2024, the energy credit is 10 percent.

There are some exceptions to qualify for the credit. First, 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.

Secondly, 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 percent for business purposes, only the expenses allocable to non-business use qualify for the credit.

Finally, 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.

Please let us know if you would like more information about how to qualify for this tax credit or other tax saving advice.

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