Renewable Electricity Credit
Most systems of renewable electricity will pay for themselves over the course of a few years. To add a more immediate incentive for the installation of this technology, the government offers additional financial incentives in the form of tax credits.
Among these, the largest is a federal renewable electricity credit for taxpayers. If you install a system of renewable electricity for your home, the government will reduce your taxes by 30% of the project’s cost. In effect, you will pay only 70% of the cost of your system.
Qualifying Energy Systems
Four types of systems qualify for the renewable electricity credit:
- Solar electricity – The credit applies to any system using photovoltaic panels to provide electricity to a house.
- Geothermal heat – These systems pump water up and down a long well, which enters a region of constant temperature. The water rises to this temperature at the bottom of the well, then returns to the surface to provide heat.
- Wind turbines – A residential windmill is another creditable source for home energy. The government stipulates that these windmills must be relatively small, with capacity of lower than 100 kW.
- Solar water heaters – Any type of system that uses solar radiation to heat water, regardless of how this energy is actually transferred, is eligible for the credit. More than half of the energy used for heating water must come from the sun. (All Energy Star certified units meet this requirement.) This system will not necessarily use electricity, although it may substitute for it.
About the Law
The most recent legislation governing the energy tax credit is the American Recovery and Reinvestment Act of 2009. Some important details:
- This law stipulates that the 30% credit will remain in place through 2016. (Of course it may be renewed or even improved after that time.)
- Taxpayers can receive credit for improving almost any property they own. Second homes, trailers, houseboats, and condominiums are all included.
- There is no longer any cap on the renewable energy credit; the government will reimburse 30% of any amount. (Formerly, $2000 was the maximum credit).
Receiving the Credit
If you install a qualifying system on your property, you receive your credit when you do your taxes for the year. Make sure to save all paperwork related to the installation of your new energy system. Necessary modifications to the house—for example, adjustments to the roof for the purpose of accommodating solar panels—can also count towards your credit.
The IRS provides a special form (Form 5695) to complete for the credit. This form also allows homeowners to claim tax credits for other projects, such as improvements in windows, doors, and insulation. You can rely a manufacturer’s certification of a product without having to actually send in this document along with your taxes; it may be necessary to search on the company’s website to determine whether a particular product meets the government’s requirements. After you fill out Form 5695, you indicate the credit on your 1040.
The renewable electricity credit is non-refundable, which means that you cannot actually receive money as a result of it. It only serves to diminish the amount that you would otherwise have paid. The credit is still distinct from a deduction, which decreases the amount of income on which tax is paid.
In addition to the federal tax credit for renewable electricity, there are other incentives offered by state and local governments. Taxpayers may claim both types of benefits when they install renewable energy systems on their property.
The U.S. Department of Energy maintains a comprehensive database http://www.dsireusa.org/ of energy offered by state governments. This database can be searched according to many different criteria, such as region, incentive type, and technology type.