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Knock $4,000 off Your Taxes by Going Solar

Save even more by adding state incentives to those in the new federal energy bill, the first in 20 years



In the new energy law, the U.S. Congress lavished tax breaks on its usual fossil-fuel favorites—there's $1.6 billion in tax credits for new coal technology, $1 billion for gas distribution lines, another $1 billion for oil and gas exploration costs, $400 million for oil refineries, and so on.



But the solar energy industry is betting that its comparatively tiny share of the energy bill spoils will be enough to jump-start the industry.


The cost of the solar tax breaks to the U.S. Treasury—less than $52 million out of a $14.5 billion energy package—may seem trifling. But the handout shows that Washington supports solar, and that should encourage more states to offer breaks too, solar supporters say.

"For anybody who has ever considered installing a solar system, Washington is telling you to do it now," says Rhone Resch, president of the Solar Energy Industries Association in Washington, D.C. That's good news for solar equipment manufacturers like General Electric and Evergreen Solar.

Claiming the credit

The law both increases tax credits for commercial solar installations and offers individual homeowners a credit for the first time in 20 years. (An earlier personal-use solar credit was in effect from 1979 to 1985.)



Companies such as FedEx and Johnson & Johnson that have already installed solar systems on some properties, and have made a commitment toward adding more, are likely to pick up the pace, predicts Resch. "The federal incentives by themselves will not create a market for solar energy, but when combined with state incentives, you reach the economic tipping point to make it work," he adds.

Homeowners get a more limited credit. They can put in a photovoltaic system (roof panels that take in energy from the sun and turn it into electricity) and/or a solar-powered hot water system (for hot water heaters, radiant floors or radiators), and get a federal tax credit worth 30% of the systems' cost, up to a credit of $2,000 per system. There are a couple of catches: The heating system can't be for a pool or hot tub, and the federal credit applies to the net system cost after any state incentives.

The good part is that this new federal break is a credit—not a deduction—meaning it reduces your tax bill directly, dollar for dollar. So, if you install both eligible solar systems in your house, you can knock $4,000 off your federal tax bill. And if you have more credit than you owe in tax, you can carry it over and use it to defray next year's federal tax bill.


Other carrots

Meanwhile, states are adding or increasing their solar energy incentives. The subsidies include low-interest loan programs, sales tax exemptions and property tax exemptions for additional property value due to the installation of solar equipment. But you get the most bang for your solar buck from direct state rebates and tax credits.

In Connecticut, for example, since last October, homeowners can get up to $25,000 back from the state, up to $5 per watt for a maximum five-kilowatt photovoltaic system. (That's a pretty generous subsidy considering that the typical home photovoltaic system costs $8 per watt installed.) New York just passed an increase in its solar tax credits, effective Jan.1, 2006. The cap for New York's 25% credit will rise to $5,000, up from $3,750—and that's in addition to utility rebates, which offset system costs by 40% to 70%.


Then there's California, home to most of last year's 90 megawatts of solar projects. When the state legislature returns to work on Sept. 15, Gov. Arnold Schwarzenegger's Million Solar Roofs legislation will be back on the agenda. The goal: adding 3,000 megawatts of solar energy by 2018, primarily by providing $2.80-per-watt rebates.


In the meantime, the solar industry is preparing to lobby to extend the federal breaks beyond the two-year window. "We're not trying to be a subsidized industry forever," says Resch, "but without longer-term incentives that provide market stability, we won't see manufacturing grow substantially in the U.S."

More information

Interested in claiming a credit? Act fast. To hold down the projected cost, Congress authorized the solar credits for only two years—from Jan. 1, 2006 through Dec. 31, 2007.


Under the new law, businesses that buy solar equipment can claim a federal tax credit equal to 30% of the equipment's cost, with no dollar limit on how big the credit can be. (In 2008, the credit reverts back to today's 10% of cost level.) Solar system incentives


A two-kilowatt system that meets most of the needs of a highly energy-efficient home should cost $16,000 to $20,000 installed, according to the National Renewable Energy Laboratory (

A five-kilowatt system for a more typical home should cost twice that but would eliminate the home’s electricity bills. The lab offers a consumers’ guide to solar power (see for more information).


In addition to the new federal tax credits, almost every state offers a smorgasbord of incentives, such as property and sales tax exemptions, income-tax credits and deductions, and subsidized loans. You can find a database of state incentives here:


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