Dear Tax Talk,
I am planning to build a garage with solar panels on it. I’ve read that qualifying structures built to hold the solar panels can qualify for the 30% tax credit. Can I use the cost of the garage toward the 30% credit also?
— Dan

Dear Dan,
The residential energy-efficient property credit is calculated based on the cost of the alternative energy equipment, which would not include the cost of your garage. Think of it in the same terms as not being able to deduct the cost of your home if the solar panels were installed on the roof of your home and not the garage.

You are correct on the 30% credit amount, and qualifying equipment includes not only solar equipment for heating water or generating electricity, but also wind turbines and fuel-cell property. Currently, the credit is allowable through 2016, so now is the time to put Mother Nature to work in your life and let her help reduce your taxes in the process.

There is no limit on the amount of the credit you can claim. And if the credit is more than your tax liability, then you can carry over the unused amount to future years.

Properties that qualify for residential energy credit:

  • Solar electric.
  • Solar water heating.
  • Small wind energy.
  • Geothermal heat pump.
  • Fuel cell.

Include in your calculation the costs of labor, assembly, original installation, and piping or wiring to connect the device to your home.

Source: IRS

Now, as far as tax return logistics to claim the credit, you will need to complete Part I of IRS Form 5695, Residential Energy Credits, and attach it to your Form 1040. There is a lot of information in the instructions, so take a little extra time and go over them thoroughly.

The home energy credits not only can lower your taxes, but the improvements also can help lower your energy bills — which helps you save money every month. The improvements can also increase the value of your home. So there is no reason not to investigate your options for “going green.”

Thanks for the great question and all the best to you with your solar project.

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