You get a federal tax credit for up to 30 percent of the cost of going solar. You can qualify for the credit whether you're adding solar panels to an existing first or a second home or building them in at the time the house goes up. At the time of publication, the credit applies to panels installed through the end of 2016.
The Residential Energy Efficient Property Credit is a dollar-for-dollar tax credit. That means that money you claim with the solar write-off comes directly off your tax bill, not just off your taxable income. If you spend, say, $12,000 on installing solar panels, you can cut your tax bill by $3,600. If you're not a do-it-yourselfer, that includes the cost of labor, not just the panels themselves. There's no upper limit on how big a credit you can get. The effect on your refund depends on how much withholding you have, and how big your credit is.
Your solar system has to provide electricity directly to your house: a solar water heater that heats the water in your swimming pool isn't deductible. The solar equipment must meet the energy-efficiency standards in the Department of Energy's Energy Star program to get a refund. If the system you're considering qualifies, you'll find a certification statement on the manufacturer's website, plus you get a copy in print from the dealer when you buy.
Once you've paid for your system, you report it on IRS Form 5695. It's pretty simple: write down the costs, add them up and multiply by 30 percent. You include solar panels, solar water heaters and geothermal and wind-power costs on the same form. If the credit more than wipes out your taxes, you don't get the extra money back. Instead, you carry the leftover credit forward and take it off next year.
If you pay state income tax, you may also get a bigger state refund for putting in solar panels. The federal Department of Energy's website includes a page with links to different state energy-efficiency tax incentives, making the research easy. Oregon, for example, allow a $1,500 annual tax credit -- up to a maximum of $6,000 in tax credits over multiple years -- for homeowners who install solar or other energy-efficient technology. It has to meet Oregon state standards, and you need to certify this before you install it.
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