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If you installed an alternative energy system in your home that relies on a renewable source, this credit is for you. Renewable energy sources include solar, wind, geothermal or fuel cell technology to generate power. Solar panels, solar electric equipment, solar-powered water heaters and wind turbines are all eligible for the credit, whether they are installed in a primary residence or vacation home. A residential fuel cell, however, must be installed in your primary home to qualify.
The size of the tax credit varies and equals 26% of the cost of equipment and installation for renewable energy systems that were put in between 2020 and 2022. The credit falls to 23% in 2023 before expiring in 2024. Pre-2020 installations qualified for a 30% tax credit. There is no maximum dollar limit for solar, wind or geothermal equipment, but the tax credit for fuel cells is capped at $500 for each half-kilowatt of power capacity. Any unused portion of the credit can be carried over to future tax years.
Keep in mind you can only qualify for the credit once the alternative energy system has been installed. If you buy solar panels at the end of 2021 but don't install them until early 2022, you cannot claim the 26% tax credit on your 2021 return. Instead, you must wait and claim it when you file your 2022 taxes.
Homeowners who install a renewable energy system sometimes qualify for a rebate from their utility company, which will affect the tax credit amount. Although these rebates are nontaxable, the cost of the system is reduced by the rebate amount when you calculate your tax credit. For example, if you install a $20,000 solar system this year and the utility gives you a one-time installation rebate of $1,000, your tax credit is $4,940 (26% x [$20,000 - $1,000]).