Alternative energy: tax credits make it more affordable

Iris Price | Improvement Center Columnist | December 29, 2014

Only a few years ago the federal government provided tax incentives for a wide range of energy-saving home improvements that included all kinds of products endorsed by ENERGY STAR. Today, there are just a handful of remaining products eligible for residential energy-saving tax credits, and they are due to expire December 31, 2016.

The cost of those energy-efficient systems that still qualify for the residential energy tax credits -- small wind turbines, geothermal heat pumps, solar energy systems, and fuel cell and microturbine systems -- are not cheap. Fortunately, however, the tax credits for purchasing and installing them are quite generous. If you have been kicking around the idea of purchasing a major alternative energy system for your home to save energy, don't procrastinate too long. To make sure you get the best return on your investment overall, you might need to explore financing strategies and make a decision soon in case interest rates start to climb as anticipated.

Which is the best alternative energy system for you? That depends on long-term costs, savings, and resale return on investment, above and beyond your initial expense and tax rebate. Factors to analyze include your home's location and orientation, regional climate, system maintenance costs, additional state and local utility company incentives and the potential resale value of your home with the energy-saving home improvements.

Highlights of alternative energy tax credits

  • How much can you recoup in tax credits? The federal tax credit program for consumer energy efficiency returns 30 percent of your purchase price, and installation costs are included for all eligible products. There is no maximum limit with the exception of fuel cell and microturbine systems, which qualify for 30 percent up to $500 for every 0.5 KW of capacity.
  • Does your home qualify? For residential fuel cell and microturbine systems, only your principal home qualifies. For all other eligible products, the home can be your principal or secondary residence. You can install qualifying systems in your primary home and your vacation get-away and claim the credits for each. Existing and new-construction homes both qualify under the program.
  • How do you claim the credits? Save your receipts and product certifications. You must file IRS form 5695, "Residential Tax Credits," with your 1040 return. Some local utility companies and state programs offer additional incentives and/or tax credits for these and other types of energy-saving upgrades. For example, systems that rely on nature's cooperation to produce energy, such as solar and wind, are usually connected to the grid to supplement your household's needs for electricity when the sun's not out or breezes are too gentle. However, during times when your system produces more energy than you need, the utility might pay you for the excess energy you transfer back to the grid. Check the Database for State Incentives for Renewables and Efficiency (DSIRE) to obtain more information on programs relevant to your locale. As with any tax matters, consult a tax professional for advice relating to your tax filing or consequences.

Alternative energy systems eligible for tax credits

  • Small residential wind turbines. A wind turbine converts the power of the wind's movement into energy that is compatible with and can be used to power your home's electrical system. To effectively do that, the wind must be blowing more than 7 mph. The average household requires a system rated for between 5 - 15 kilowatts to produce 1,000 - 2,000 KW-hours. Systems eligible for the tax credits must be rated for no more than 100 kilowatts.
  • Geothermal heat pumps. Geothermal heat pumps utilize the earth's natural and consistent underground temperature to provide residential heating and cooling as well as water heating using the process of heat exchange. According to Energy.gov, a geothermal heat pump system's in-ground loop should last 50 years, and the indoor components about 25 years. You can typically make back your investment in energy savings within five to ten years.
  • Small solar energy systems. Tax credits are available for photovoltaic panels and for solar water heating systems that use the power of the sun to generate at least 50 percent of their energy. Water-heating systems must be certified by the Solar Rating and Certification Corporation (SRCC) or another state government-endorsed entity. Heated water must be for indoor household use only. Residential photovoltaic panels that capture and convert sunlight directly into electricity for the home are eligible for the federal tax credits if they meet code requirements.
  • Residential fuel cells and microturbine systems. Fuel cells are a clean-energy technology that use a chemical process combining oxygen and hydrogen to produce energy from natural gas or propane. They have yet to gain widespread popularity for residential use because of their high cost. A fuel cell can supply electricity directly into the your home's electrical system. The byproducts of the chemical process -- heat and hot water -- can be used to heat your home and your home's water using heat exchange technology.

Photo credit to Kevin Irby

About the Author

Iris Price is a single Baby Boomer whose antidote to a lack of retirement funds was to launch a long-delayed career as a writer. While others her age concoct bucket lists and travel the world, she bought a new-construction home and obsessively creates lists of must-have home improvements and personal realization goals. She specializes in writing about home services and self-motivation.