Homeowners who purchase solar power systems are entitled to a federal income tax credit equal to 30% of the installed cost of the system. A tax credit is subtracted from your tax bill, so its cash value is the full amount of the credit. Therefore, a $10,000 tax credit is worth $10,000 to you. This is superior to a basic a tax deduction, which is subtracted from your income, not the tax you owe. A tax deduction is only worth the amount of the deduction multiplied by a taxpayer’s effective tax rate. For example, at a tax rate of 25%, a $10,000 deduction is only worth $10,000 x 25% = $2,500.

A $30,000 solar power system has an effective net cost of just $21,000 after the 30% solar tax credit. Every homeowner should be taking advantage of this tax credit!

The tax credit is not subject to a maximum amount and it can be taken against the alternative minimum tax. If the tax credit exceeds your income tax liability for the year the system is placed in service, the excess amount can be carried forward to future tax years until it is used in full. A W-2 employee can change the number of personal exemptions on IRS Form W-4, to temporarily reduce withholding and realize the cash value of the tax credit more quickly. A self-employed person can reduce quarterly estimated tax payments. Or the taxpayer can just wait until filing the income tax return for the year during which the solar power system is placed in service, to realize the cash value of the tax credit. Please seek the advice of your tax professional to determine which approach is best for you.