Tax Benefits of Residential Solar Power

It's great if you’re concerned about protecting the environment and using renewable energy, but chances are that you also have to think about your budget before investing in residential solar power. Substantial tax benefits are available to help homeowners cover the costs of new solar systems. Once you've made the initial investment, your operating costs should be low, providing savings on utility bills for years to come.

Federal Tax Credits

The federal government provides tax benefits in the form of tax credits for two types of solar residential energy: solar water heaters and the production of electricity. The tax credits cover up to 30 percent of the cost of equipment and installation. Homeowners must place the systems in a primary or second home, either new or already built. These tax credits expire Dec. 31, 2016, as of 2011.

Photovoltaic Panels

Photovoltaic or solar panels consist of arrays of semiconductor cells that use sunlight to generate an electric current. To qualify for the federal tax credit, a solar photovoltaic system must comply with all applicable building and safety codes. Small solar panel systems used in remote locations such as vacation cabins are eligible for the tax credit.

Water Heaters

Solar water heaters collect the sun's heat to provide part or all of the energy needed for residential water heating. Systems must be certified by the Solar Rating and Certification Corporation and must get at least 50 percent of their power from the sun, but may draw on conventional power sources for the rest. Solar water heaters used for heating residential swimming pools and hot tubs are also eligible for the tax credit.

State Tax Benefits

States offer tax benefits for residential solar power as well as other alternative energy systems, energy saving products and home improvements. These tax benefits may be in the form of tax credits or deductions from state and local governments. Programs vary from state to state. The Database of State Incentives for Renewables and Efficiency provides searchable listings online of state and local tax incentives for residential solar power systems.