Solar Energy

Under pre-act law, no tax credit was available on an individuals federal income tax return for investments insolar energy equipment.

The new law changes that by providing a non-refundable personal tax credit for the purchase of photovoltaic equipment (i.e., equipment that uses solar energy to generate electricity) and solar water heating property that is used exclusively for purposes other than heating swimming pools and hot tubs. The credit equals 30 percent of the investment, with a maximum credit for each of those systems of $2,000 (so the maximum credit would be $4,000 if both systems were installed). Labor costs related to installation qualify for the credit.

The credit applies to equipment placed in service in 2006 or 2007. Pre-act law provides a 10 percent business energy credit for the cost of solar energy equipment. The new law increases the 10 percent credit to 30 percent for business purchase of solar energy property. In addition, the new law makes equipment that uses fiber-optic distributed sunlight to illuminate the inside of a structure solar energy property eligible for the 30 percent credit. However, property used to generate energy for the purposes of heating a swimming pool is not eligible.

The increase in the credit rate and the provision relating to fiber-optic distributed sunlight apply to periods after Dec. 31, 2005, and before Jan. 1, 2008. The credit reverts back to the permanent 10 percent level after 2007. The provision with respect to the heating of swimming pools applies to periods after Dec. 31, 2005, and applies permanently.

As alternative energy sources are developed, the government will continue to encourage their use with tax credits. Check with your accountant to see how you might qualify.

New sources of energy are being developed that will result in more energy efficiency and will decrease our dependency on nonrenewable energy resources.
For more information, go to www.eere.energy.gov/RE/.

Hybrid Vehicles

For new hybrid vehicles purchased beginning Jan. 1, 2006, the purchaser is allowed a tax credit of from $400 to $3,400 depending on the model.

The amount of the credit depends on the fuel efficiency ol the vehicle. The more gas it saves, the higher the credit. However, calculating the credit is a bit complicated, with the exact amount of your credit depend-ing on three separate factors: the weight of the vehicle, its fuel economy and its lifetime fuel savings. This information should be available from your dealer.

Two more hybrid vehicles were certified for clean fuel deduction. IRS has certified the 2006 model year Lexus RX 400h and Toyota Highlander Hybrid as being eligible for the clean-burning fuel deduction. The IRS had earlier certified the following model year 2005 hybrid gas-electric automobiles as being eligible for the clean-burning fuel deduction: the Ford Escape SUV, Toyota Prius, Honda Insight, Honda Civic Hybrid and Honda Accord Hybrid.

The credit is set to expire at the end of 2010, but for many hybrid models the incentive will end much sooner. That is because the law limits the credits to 60,000 vehicles from each automaker. Once a manufacturer has sold 60,000 hybrid vehicles, the tax credit for that manufacturer's hybrids is slowly reduced over the next five consecutive quarters, eventually dropping to zero. For manufacturers who are currently offering popular hybrids, the tax credit could begin to be reduced as soon as the fourth quarter of 2006. For other manufacturers, their hybrid cars will have the full tax credit for a longer period.