Solar Panels

• Solar panels are also known as photovoltaic panels. These are what people commonly associate with solar energy; however, new versions of these panels have been incorporated into roofing shingles and tiles. Semiconductor material in the panels use light to make direct current electricity. Each panel has a rated output so you can divide your home's electricity needs by the panel output to determine how many panels you'll need for your house.
  
  

Solar Water Heating

• A solar water heating system is an even more efficient way to use solar power. According to "Home Power" magazine, solar water heating is three times more efficient at producing energy than a solar panel. When in use, it can cut your water heating cost by 60 to 70 percent, according to the California Energy Commission. Use these systems to heat bath, dish and laundry water. The time it takes for the system to pay for itself is four to eight years.
  
  

The Credit

• You can deduct 30 percent of the cost of the solar energy systems (labor, preparation, components, installation) installed in your residence, and, as of 2009, there is no cap on the maximum credit you can get. You will need to fill out Form 5695 Residential Energy Credits to get the credit. As a tax credit, the amount you receive gives you a dollar-for-dollar reduction of your federal taxes. This has a greater tax advantage than a tax deduction, which only reduces your taxable income.
  
  

Qualifying Purchases

• Not all solar energy systems will qualify for the tax credit. Qualifying systems are certified for performance by the nonprofit Solar Rating Certification Corporation or another organization recognized by the federal government state in which the property is installed. This is a different certification than the Energy Star rating the Department of Energy uses and not all Energy Star equipment will qualify for the tax credit, according to the IRS.