As if 2015's record amount of newly installed solar power sources wasn't enough, 2016 is now forecast to double that installed capacity. Driving this boom has primarily been the falling costs of solar panels.
In many states, you can install a residential solar system for an average cost of $7,500 to $10,000. But with the continuation of generous subsidies in the form of tax credits, this cost is further lowered for businesses as well as homeowners. In December, Congress renewed and in some cases extended a number of tax credits for residential energy efficient improvements that were set to expire.
If you're considering going solar, or making an energy-saving upgrade to your home, here are the tax credits you can claim for energy-efficiency improvements that you purchase and place into service in 2016.
If you can claim a tax credit of 30 percent of the cost to install a solar energy system on your home, with no dollar limit. So if you pay $7,000 for a solar panel array or a solar water heater, and related batteries, mounts, wires, connections, etc., you're entitled to a tax credit of $2,100. Because the credit is a dollar-for-dollar reduction of your tax liability, it effectively cuts your system's cost to about $4,900.
And if the upgrades reduce your electric bill by about $120 per month, you'll recoup the net cost of the solar system in about 3.5 to 4 years. After that, you'll bank 100 percent of the monthly savings.
Beyond having no dollar limit, this generous tax credit also applies to small residential wind turbines (capable of no more than 100 kilowatt output) and geothermal heat-pump systems. It's available for these items installed on both new and existing homes and applies to principal residences and second homes.
The tax credit was extended at 30 percent through 2019, after which it decreases to 26 percent for 2020, 22 percent in 2021 and expires at the end of 2021.
You can also claim a tax credit of 10 percent of the cost of energy-efficient devices you install on your principal residence, such as furnaces, central air conditioning, heat pumps, insulation and roofing. Ditto for new water heaters, windows and doors.
But this tax credit is more limited. First, it's capped at $500. And it applies only for items purchased and installed in 2016 (it's set to expire in 2017) and doesn't apply to new construction or second homes. Before you buy any of these items, make sure to ask the manufacturer or retailer to provide the energy-efficiency certificate that confirms they're eligible for the tax credit.
You'll need to complete a Form 5965 - Residential Energy Tax Credits to calculate the amount you can claim. If the credit reduces your tax to zero, you can carry forward any unused portion to the next year. This credit carry-forward is allowed only for systems eligible for the 30 percent credit. It's not clear how long you can carry forward an unused credit because the IRS hasn't yet issued guidance on this matter.