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George Saenz, the Bankrate.com Tax Talk columnistTax credit for solar panels

Dear Tax Talk;
Let's say I want to install solar panels to power my new home that will have a build completion date either the end of 2006 or early 2007. What kind of tax credit will I be allowed?
-- Anthony

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Dear Anthony;
Although I covered this recently, since then the IRS has released Notice 2006-26 that provides interim guidance for the energy credit. The Energy Policy Act of 2005, signed by President Bush on Aug. 8, 2005, offers consumers and businesses federal tax credits beginning in January 2006 for purchasing fuel-efficient hybrid-electric vehicles and energy-efficient appliances and products. Most of these tax credits remain in effect through 2007. A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar for dollar while a deduction only reduces the amount of income on which you are taxed. Although the law is six months old, the IRS has still not addressed all the credits available.

I'm an accountant and not an engineer, so it's kind of difficult to understand what types of devices are referred to in the IRS notice. In addition, the notice doesn't cover all the types of energy-saving components that are eligible for a tax credit. Actually, the notice doesn't talk about solar panels. Instead the notice addresses more interesting items such as geothermal heat pumps in an open and closed system. You can get up to a $300 tax credit for installing a system.

Although the notice didn't address solar panels, the press release introducing the notice provided the following information about solar panels:

The new law makes a credit available to those who add qualified solar panels, solar water heating equipment or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity-only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity.

Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub.

Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each 0.5 kilowatt of capacity.

With respect to the exclusion of pools and hot tubs, it's my understanding that if the system includes electricity or hot water to heat either, then the system would be ineligible altogether. You can find more information on tax credits at energystar.gov, and we'll try to keep you posted as more information becomes available.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: March 9, 2006
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