This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The American Recovery and Reinvestment Act which was enacted earlier in early 2009, expanded this credit. The new law removes some of the previously imposed maximum amounts and allows for a tax credit equal to 30% of the cost of qualified property. The credit amount is generally equal to 30% of the cost of the equipment and usually includes the labor used to install it. Beginning in 2009, there is generally no cap on this credit and it's available for equipment placed into service through 2016. Unfortunately it's a nonrefundable credit, which is an important distinction because that means it can only reduce your tax liability to zero.

Credit amount The credit is for property placed in service prior to January 1, 2017 and for the most part, the credit is equal to 30% of the eligible cost of solar electricity equipment, solar water heaters, fuel cell plants, qualified small wind energy property and qualified geothermal heat pump(eligible equipment).

Qualifying property The following types of property may qualify for the 30% credit:

o Qualified solar electric property costs for expenses incurred for property that uses solar energy to produce electricity for use in your home. These costs may be used to purchase a solar panel or other property that may be installed on a roof. These costs do not have to be incurred for your main home.

o Qualified solar water heating property costs pertain to expenses incurred to heat water for use in a dwelling located in the United States and used as a residence if at least half of the energy is derived from the sun. An example is solar panels. In this case, the home does not have to be the taxpayer's main home.

o Qualified small wind energy property costs pertain to expenses incurred for property that uses a wind turbine to generate electricity for use in the taxpayer's home. For this type of expenditure, the home does not have to be the taxpayer's main home.

o Qualified geothermal heat pump property costs are costs for property installed on or for a taxpayer's home. The home does not have to be the taxpayer's main home. The equipment that uses the ground or groundwater as thermal energy source to heat or cool the taxpayer's home is called a geothermal heat pump.

o A qualified fuel cell power plant that is an integrated system comprised of a fuel cell stack assembly and associate components that converts fuel into electricity. The fuel cell must be installed into the taxpayer's main home.

The credit also includes the related labor costs resulting from paying installers and other professionals used for on-site preparation, original installation, or assembly of the residential energy efficient property as well as wiring and/or piping that can connect the home with the eligible property.

Basic credit limits The $500 limitation on qualified fuel cell property is the only credit limitation. There is no limit to the 30% credit based upon the eligible equipment.

There may be some confusion about the certification since this credit has existed in the past. It is important for each taxpayer to verify that the certification statement is for the 2009 credit rather than a credit for an earlier year. A word of caution, since certain slow-moving energy-efficient products from prior years' may be aggressively marketed at closeout prices, it's important for you to verify that you have purchased a current year product with the 2009 certification from the manufacturer in order to use the credit on your 2009 tax return.

The amount of the residential alternative energy credit that can be claimed cannot exceed your regular income tax liability(reduced by the foreign tax credit,if any) and the alternative minimum tax, over the sum of certain nonrefundable credits. In 2010 the limitation changes and reference should be made to the applicable IRS regulations. For jointly owned property special pro ration rules need to be applied.

In order to obtain the credit, you must complete Form 5695. Before completing Form 5695,you need to calculate any credit for the elderly or the disabled,or other motor vehicle related credits. The credit is limited to your tax liability and the credit cannot be utilized if you have no tax liability. Also, the credit is not available if you file a 1040EZ and 1040A. To use this credit you will now will have to file a regular Form 1040.

It is also important to determine the eligible credit carry forward. This is a complex calculation and for more information please refer to IRS Notice 2009-41.Tax laws are complex, change constantly and each situation is unique. This article is not intended to provide legal or accounting advice. Because the tax laws are complex, change constantly and each situation is unique, the reader is advised to do his or her own due diligence and consult with professionals in these areas.