Get tax credits for energy improvements

If the thought of rising energy bills has you rushing out to buy insulation, hold off until after Jan. 1, 2006, when the recently enacted Energy Tax Incentives Act of 2005 kicks in.

The act includes incentives to make your home more energy efficient and give solar a try. They come in the form of tax credits, reducing federal tax bills dollar for dollar. Unlike many federal programs, they are not phased out for higher incomes.

The most generous credits are available for those who add solar water, heat or power to their homes. It wasn't very long ago that installing virtually any kind of solar device was a labor of love without much economic value. But with the federal incentives -- combined in many places with utility and state incentives -- solar is looking like a much better deal.

The new energy law encourages taxpayers to claim a tax credit each year in both 2006 and 2007 for these expenses:

30 percent of the cost of solar water-heating equipment, up to a $2,000 maximum tax credit for each tax year;
30 percent of the cost of solar equipment that generates photovoltaic electricity, up to a $2,000 maximum tax credit for each tax year; and
30 percent of the cost of a fuel-cell power plant, up to a $500 maximum tax credit for installation in a taxpayer's principal residence. This new technology converts fuel into electricity using electromechanical methods and meets other detailed requirements. But don't get too excited about this one. This technology isn't yet available for practical use to residential consumers. On top of that, it's not likely to be available within the next two years, which is the duration of this tax credit. But if you are interested in being on the cutting edge, check out Plug Power and Ballard Power Systems. These companies, according to their spokespeople, are within a few years of offering systems that are available for residential use.
The best solar deal
Solar equipment -- particularly solar water heaters -- is a lot more reasonably priced, easier to install and generally more practical than it's ever been.

While installing photovoltaic systems can be pricey with payback in the distant future, installing a solar hot-water system can pay for itself quickly and, as energy prices rise, continue to save a homeowner increasing amounts of money.

"I think that even without the tax credit, solar hot-water systems are economical. You'd almost be crazy not to get a solar hot-water heater right now -- especially with natural gas prices going up," says Noah Kaye, policy and communications coordinator for the Solar Energy Industries Association.

Solar hot-water systems rely on relatively simple and cheap technology to circulate water through panels that face the sun, supplementing, and in some cases replacing, conventional water-heating systems.

The most common type of solar thermal system involves copper pipes that wind back and forth through a flat plate collector, typically mounted on a roof. The heated water is collected in an auxiliary water tank, or it can be routed straight into the main water tank, where it is either heated further by conventional means or is ready for use at the spigot or in a radiant, or radiator heating system.

Kaye estimates that a reliable system installed by a professional can cost as little as $3,500, with systems climbing to as much as $6,000 in cold climates where freezing is an issue. Once it's installed, the ongoing costs are near zero with only very occasional maintenance needed.