Tax Credits vs. Tax Write-Offs

• The term "tax write-offs" describes tax deductions. A tax deduction is an expense that the IRS allows a taxpayer to subtract from taxable income, which reduces the tax burden. A tax credit is subtracted directly from the amount of tax owed. For example, a $1,000 credit reduces taxes by $1,000 while a $1,000 write-off would only reduce taxes owed by $1,000 times a taxpayer's income tax rate. Since income tax rates cap at 35 percent for the wealthiest taxpayers, a $1,000 credit would save $350 or less on taxes.
  
  

Solar Panels

• DOE says that the credit for solar panels is equal to 30 percent of the cost of panels, with no upper limit. The credit applies to existing homes and newly constructed homes, and both primary and secondary residences. Solar panels must collect energy that is used in the home and meet applicable fire and electrical codes.
  
  

Solar Water Heaters

• Another credit is available on 30 percent of the cost of solar-powered water heaters, with no upper limit. ENERGY STAR says that water heaters must generate at least half of the energy used to heat water from the sun to qualify for the credit, and that water cannot be used for pools or hot tubs. The credit includes the cost of installation.
  
  

Considerations

• Tax credits for solar panels and water heaters are not refundable. This means that if credits reduce income tax liability to zero, a taxpayer cannot get a tax refund for any credit that remains. ENERGY STAR states that tax credits for solar panels that go unused in one year can be carried over from one tax year to the next. This means that if a taxpayer is unable to use the entire credit in one year, he can apply any remaining credit toward his taxes in the following year.