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Federal Tax Credits for Residential Solar Energy

By Solar energy | October 30, 2008

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Federal Tax Credits for Residential Solar Energy

While I am unhappy that our tax dollars are being used to bail out unprincipled and dishonest banks, I am pleased about the extended tax credits that accompanied this bail out. (To understand how these banks worked their scheme, read this transcript from NPR’s This American Life.)

But it takes a bit of reading to understand exactly how the renewable energy tax credit benefits.

Good news: A tax credit is more valuable than a tax deduction of the same dollar amount.

A tax deduction reduces the amount subject to taxation.

A tax credit reduces the amount of tax one is required to pay.

So the recent 30% federal tax credits for residential solar energy systems excites solar advocates. That $25,000, 2.5-kilowatt system affectively cost $17,500, a savings of $7500.

The $7500 returns comes to you in federal tax savings. Right?

Well, maybe.

Seems there are two kinds of tax credits: refundable and non-refundable.

Residential energy credit falls in the non-refundable category.

A non-refundable tax credit can reduce your tax liability to zero (0), but not below. So, in our example above, if at the end of the year your tax liability is $4000, then the only tax credit you get is $4000. Uncle Sam will not issue you a check for $3500.

Before you run out and buy that solar energy system check with a qualified tax professional.

The solar professional can help you with all the applications for all federal, state, and local tax credits due you.

But the tax professional can look at your financial situation and let you know how much of that tax credit you can actually get.

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