Q&A: Are there any tax credits for installing a residential solar-energy system?

Hoping to save on our energy bills, we're considering installing a solar water heater at our home. Does the federal government offer any tax breaks for these systems?

Given the high upfront expense of solar photovoltaic (PV) systems and solar water heaters, it's no wonder you're interested in financial incentives to alleviate some of the cost. Federal tax credits for PV systems and solar water heaters do exist, though you'll need to move quickly because they expire this December 31. (OCTOBER 2008 UPDATE: The $700 billion Emergency Economic Stabilization Act of 2008 extended and expanded the tax credits for residential solar systems. Read more in this post from the Consumer Reports Money blog.)

Advocates of solar energy fear the end of the tax credits will discourage adoption of these promising technologies. "If the federal solar credits expire as planned, it will definitely put a huge damper on the market, and we'll see a large drop in installations," says Larry Sherwood, a consultant to the Interstate Renewable Energy Council, a nonprofit that promotes renewable energy.

Federal tax credits for solar power have helped double the number of commercial and residential installations of PV and solar-water-heater systems since taking effect in 2006, according to the new "U.S. Solar Market Trends" report by Sherwood. Rising energy prices and state incentives have also played a role in spurring the market, particularly in states where those incentives have the biggest payoff.

California, with the largest state incentive program for PV systems, dominates the market with 69 percent of all installations. Similarly, Hawaii, with its generous incentives, accounts for half of the solar-water-heater market. (Read this blog post for more on solar water heaters in Hawaii.)

Still, most Americans own neither type of system since they remain prohibitively expensive. Check out this listing of state incentives for solar power; select "Solar (All)" in the drop-down menu. You'll find more information on renewable-energy incentives on the same site.

A PV system capable of fully powering the average U.S. home costs $64,000 to $80,000 installed, says the Solar Energy Industries Association trade group. While much cheaper, solar water heaters still cost $5,000 to $7,000, including installation. Such steep prices make renewable-energy incentives attractive.

The existing federal incentives allow you to take a 30 percent tax credit up to $2,000 for the purchase and installation of a PV system or solar water heater. But even that's not enough, says the SEIA, which is pushing for an eight-year extension of the federal credits and to eliminate the existing $2,000 limit for residential buyers.

Some progress toward that goal has been made. Last May, the U.S. House of Representatives passed the Renewable Energy and Job Creation Act of 2008, which extends the credits for eight years and also doubles the cap to $4,000 for residential buyers. But after eight attempts, the Senate has failed to pass a bill of its own.

Given the need for more secure, clean-energy technologies, we shouldn't let the sun set on these important incentives.—Kristi Wiedemann, Science and Policy Analyst, GreenerChoices.org

Essential information: Find out how solar and other renewable-energy technologies are greening the workforce, get the latest buzz on backyard wind power, and learn about tax credits and rebates for energy-efficient appliances. Also read what Consumers Union has to say about the hidden price you pay for energy.—Kristi Wiedemann, Science and Policy Analyst, GreenerChoices.org

Comments

[Total Solar Energy]

from what i'm aware, it varies from state to state

[kay jones]

I see Energy Star lists tax credits for home improvements, specifically new energy efficient heating / cooling systems, that are put in service Jan 1 through Dec 31, 2009. Are there any tax incentives for systems installed Jan 1 through Dec 31 2008? Maybe from some other program? Or a line item deduction on your income tax report?