How Green Tax Credits Work

The Renewable Energy Tax Credit

The Renewable Energy Tax Credit is one of the few tax incentives for individuals and families going green still in place in 2014. It was created under The Energy Policy Act of 2005 and can be claimed by taxpayers through at least 2016. The credit applies to various efforts to make your home more energy efficient, including the installation of solar-electric systems, solar water heaters, small wind-energy systems and geothermal heat pumps [source: Department of Energy].

Tax filers who are eligible for the credit can claim 30 percent of the money they spend on renewable energy improvements, so long as the costs were incurred on a home owned by the taxpayer. For those who install energy efficiency systems in a new home, the costs can be applied to a credit for the tax year in which the person or family moves into the residence [source: Department of Energy].

Unlike many other tax credits — and a former version of this one — there is no cap on the dollar amount for most covered improvements put in place after 2008. One exception to that rule is the installation of a fuel cell, a compact heat and power system that converts natural gas into hot water and power for a home. These systems are eligible for a renewable energy credit of $500 for every 0.5 kilowatts (kW) that the fuel cell has in capacity. To obtain the credit for a fuel cell, it must be installed in the taxpayer's principal residence [sources: Department of Energy, Fuel Cell Residential].

Each of the renewable energy improvements covered under the credit has to meet certain eligibility requirements. A solar heating system, for instance, has to be certified by the Solar Rating Certification Corporation, or a similar entity approved by the government of the state in which the system is installed. Geothermal pumps, on the other hand, must meet federal Energy Star criteria. A list of the requirements for various credit-eligible systems is available on the Energy Department's website [source: Department of Energy].