According to Energy Star, a solar water heater can slice your water heating bill by $140 per year, or $2,900 over your system's life. The sun's power can also save you at tax time, thanks to the Residential Energy Efficient Property Credit. Rather than a deduction which reduces only your taxable income, this credit -- which lasts through December 31, 2016 -- directly cuts your taxes dollar-for-dollar.
Solar Energy and Homes
To be considered a solar water heater, at least half of the energy must come from the sun. You don't lose the credit merely because your solar panels are part of the roof or other part of the home. The credit is not limited to your main home; you can include water heaters installed on second homes, but not those on rental properties. The solar water heater can be in a new home or existing pad.
Counting the Costs
Include the costs of materials and labor for assembling and installing the system. If you're in a condominium, count your share of the costs according to the proportion of your ownership. For example, if you own two of 10 units in a condominium, you claim 20 percent of the costs. Exclude costs you paid with tax-free subsidies.
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Calculate the Credit
Use Form 5695 to determine the credit. Figure what your tax would be without tax credits and report it on line 46 of Form 1040. Add the credits you claim on lines 47 through 50 of Form 1040, and credits for items such as mortgage interest and adoption expenses. Subtract these credits from the number you report on line 46 of Form 1040 to determine the limit of your tax liability. Take 30 percent of the costs of your solar water heater system, up to the limit, and carry over that portion of the credit that exceeds the limit to the next year. Attach Form 5695 to your Form 1040.
Even if you don't qualify for a tax break, you might get a price reduction with an Energy Star water heater. Go to energystar.gov and click "Rebate Finder" under the "Energy Efficient Products" link. Enter your zip code in the Rebate Finder to see if an Energy Star dealer is available. Your utility company may offer rebates, deals and price breaks. For example, the Sacramento Municipal Utility District provides an $800 rebate for energy efficient, non-solar water heaters.