Solar power not only saves you money on your power bill, it can help shrink your taxes. Rather than giving you a tax deduction, the federal government offers a tax credit for solar-power purchases: You subtract part of the cost of qualifying equipment directly off your tax bill rather than your taxable income.
If your solar equipment meets the federal Energy Star standard for energy efficiency, you can claim a tax credit equal to 30 percent of the purchase price; you can also include 30 percent of the cost of installing the system as part of your credit. There's no limit to how bit the credit can be: The more expensive the equipment, the bigger your credit. The tax credit applies to all qualified purchases through the end of 2016.
Even if your solar water heater is Energy Star approved, you have to meet additional standards. Your heater doesn't have to be 100 percent solar-powered, but least 50 percent of the energy it generates must come from the sun. It must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable authority. The tax credit also applies to photovoltaic systems, solar panels that convert the sunlight hitting them into electricity. Solar panels have to meet your local fire and electrical code.
The Energy Star credit is specifically for residential power. You can claim the credit for your home or a vacation home, if you have one, but not for installing it at a rental property. If you install a water heater at your home but the water all goes to your hot tub or swimming pool, that doesn't qualify, either: The water must be used in the house itself. Likewise, your solar panels need to generate home electricity to earn you a credit.
To apply for the tax credit, you'll need IRS Form 5695. Calculate the size of the credit on that form, then carry the amount over to the corresponding space on your 1040. Claim the credit in the year you purchase the equipment and only that year: Even if you keep the equipment several more years, you only get the credit once. To prove you're entitled to the credit, save your receipts and the manufacturer's certification statement in your files.