One of the biggest benefits of using solar energy is that the primary fuel source – the sun – is unlimited and free. Of course, the equipment required to harness all that free energy comes with a price tag. Solar leases and solar power purchase agreements can drastically reduce or eliminate upfront costs when installing solar on your home. But what if you prefer to buy your solar panels? Upgrading your home energy system with solar panels may also increase your property value, which could affect how much property tax you owe. Considering these expenses, will your solar panels actually save you money?
Luckily, there are numerous financial incentives, such as state and federal tax credits and rebates, designed to cut some of these costs and encourage the use of residential solar power. These incentives vary widely by state, and are especially plentiful in ‘prime states’ like California, Texas, Colorado and New York.
Whether your solar panels are purchased or leased, you may be surprised just how many options there are. Understanding which incentives, credits and rebates are available to you can be intimidating and take some time. However, it is well worth the effort. If you take full advantage of government rebates and tax credits, you may find that solar power can be even less expensive than utility power.
When exploring which financial incentives are available to you, here are some things to consider:
It’s best to work with an experienced solar installer, who will be familiar with the incentives in your state and region, and the process and paperwork required to get them. Ask your installer to assist you in identifying and applying for them. Many will even take care of all this paperwork as part of their service package. Tax credits and rebates are often directed to the owner of a residential solar system, so if you’re leasing your panels, you can expect the professional contractor to file and collect these incentives.
If you’re delving in on your own, purchasing or installing solar panels independent of a solar installation company, remember to collect all of the documentation related to your project’s expenses. Do your research, and consider consulting with a tax professional before you file.
If you’re wondering what financial incentives apply to your project and are available in your area of the United States, check out the Database of State Incentives for Renewable Energy (DSIRE). Operated by the North Carolina Clean Energy Technology Center and funded by the US Department of Energy, DSIRE provides an extensive, searchable summary of renewable energy and energy efficiency incentives. Click on your state, then filter results to explore and zero-in on financial incentives like rebates and personal tax exemptions. Use the “Technology” and “Renewable Energy” filters to find offers related to solar technology.
Financial incentives for residential solar projects vary greatly depending on the state where your property is located and the year in which your system is placed in service. Here is a look at the general types of incentives.
Loan programs are offered at the federal and state level to purchase solar systems and equipment. State programs, for example, may offer a low or zero interest rate, typically for a term of ten years or less.
Personal tax incentives, such as tax credits and deductions, reduce the upfront cost of purchasing and installing a residential solar system if you decide to buy. Eligibility requirements (such as which types of equipment qualify for the credit) and the maximum amount you can deduct vary by state.
Property tax incentives: Adding a solar system to your property may increase the value of your home, which could mean higher property taxes. Solar property tax incentives exclude or reduce this added value for taxation purposes. This incentive keeps you from being penalized for adding renewable energy systems to your house.
Rebate programs are available from states, local governments and utilities in varying amounts. For example, your state may offer a cash incentive when you install qualified equipment like solar panels.
A utility may also offer you a credit if your grid-connected system produces more energy than you use, and if that excess energy goes back into the grid. This is called net metering or net excess generation (NEG). It means your utility credits your monthly bill when your grid-connected system generates excess electricity and puts it back into the grid.
If you decide to purchase – not lease – your solar PV system, either through cash or financing, you can currently deduct 30 percent of that cost through the Federal Residential Renewable Energy Tax Credit. This investment tax credit (ITC) is a dollar-for-dollar reduction in the amount of federal income tax you pay. When calculating your ITC, you can include expenses such as:
Remember, you must own your solar system to claim the ITC. In addition, your system must be “placed in service” – that is, construction completed and utility approved for operation – for the first time between January 1, 2006 and December 31, 2016. After 2016, the federal tax credit is scheduled to drop to a 10 percent deduction – although forces are at work in Congress to keep it at 30 percent. Check the status of the ITC if you plan to install or put your system in service after 2016.
If you don’t expect to owe taxes in the year of installation, or if your credit exceeds the income tax due for that year, under current law you can carry it over to the following tax year. Homeowners can claim the ITC even if the home where your solar equipment is installed is not your primary residence (as long as it’s within the US). Renters and rental properties, however, are not eligible. It’s a good idea to consult with a tax professional familiar with residential energy credits before filing. More information is available at irs.gov and on IRS form 5695.
Residential solar power is gaining momentum in many US states where sunshine is plentiful and local governments are focused on promoting renewable energy. DSIREusa.org provides up to date information on the numerous personal tax credits and rebate programs offered at the state and local level. Here are some examples from prime states.
Xcel Energy, which services several states including Colorado, Texas and New Mexico, offers a Solar*Rewards® for Residences program with incentives and rebates for installation of photovoltaic (PV) solar panels.
California’s Solar Initiative offers a rebate for excess energy generated by a residential solar system. The amount is based on either the expected or actual output of the system, and is distributed as either a one time payment or in monthly installments. Think of yourself as a lottery winner: would you like the lump sum up front, or multiple payments over time?
An Expected Performance-Based Buydown (EPBB) is like the lump sum. You’ll receive a one-time incentive payment when the system is installed. The amount is based on how much energy your system is expected to produce in the future.
A Performance Based Incentive (PBI), on the other hand, breaks your incentive payment into monthly installments over the course of about five years. The amount is based on the actual metered output of your system.
Colorado The Energy Smart Colorado Renewable Energy Rebate Program offers cash rebates to off set solar project costs.
New York The Residential Solar Sales Tax Exemption exempts eligible residential solar energy systems equipment and services from sales tax. See also: NY-Sun Incentive and NY State tax credit.
Texas The SMART Source Solar PV Rebate Program offers rebates to any customer for home photovoltaic (PV) systems at a flat rate of $1.05 per watt (W)-DC for residential customers.
Many states, and certainly the federal government, are encouraging solar energy. They want you to give it a try and are willing to help you pay for it. So don’t let the initial sticker price deter you from solar. Do a little research — you may be surprised by what’s available in the form of rebates and other incentives.