Due to the rising costs of traditional energy, solar panels have become quite popular over the past several years.   The initial investment can be rather expensive. In order to make solar panels more attractive to the taxpayer, the US Government began offering a Solar Tax Credit. Since 2005, when The Energy Policy Act was established, there has been some form of credits available pertaining to energy efficient systems.

To qualify for the credit, the system must be installed on your principal or secondary home (rental properties do not qualify). The credit is equal to 30% of the costs, with no upper limit. For example, if the taxpayer spent $15,000 to purchase and install solar panels, they would receive a $4,500 tax credit. The credit directly reduces the amount of your tax liability, as opposed to a deduction from your taxable income. This makes a huge difference. If there is an excess left over from the credit, you are allowed to carry this forward to offset your future tax liability. Solar panels seem to be the most popular when it comes to this credit, however the credit extends to fuel cell property, small wind energy and geothermal pumps.

In order to take advantage of the credit, IRS Form 5695 must be completed. Information from this form will flow through to the taxpayer’s Form 1040.  As of now, the Federal credit is set to expire on 12/31/16.

New York State also offers an energy credit. The state credit is equal to 25% of the costs, however unlike the federal credit; the NYS credit is limited to $5,000.  This credit can be carried forward for up to five years. Form IT -255 must be completed in order to take advantage of the state credit.

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