Solar power is generated by converting sunlight into electricity. This can be done either by directly converting sunlight into electricity using photovoltaic (PV), or indirectly with concentrating solar power (CSP).

In the latter process sun’s energy is used to boil water and then used to supply power, and various technologies including Sterling engine dishes in which a Sterling cycle engine is used to power a generator.

According to the Energy Policy Act of 2005, passed by the US congress, tax payers who invest in residential solar photovoltaic (PV) systems will receive tax benefits.

Hence, the solar PV tax credit is applicable to the money spent on purchasing and installing a solar PV system for the generation of electricity for usage in U.S residences. 30% of the eligible expenditure is the tax credit, which is directly credited to the tax liability and not just deducted from the taxable income. Also the congress passed the American Recovery and Reinvestment Act (ARRA), also known as the stimulus package.

For a home-owner in Sacramento, Calif., the local and federal savings can add up to almost half the price of a solar power system. The federal Residential Renewable Energy Tax Credit is extended to Dec. 31, 2016 and covers 30 percent of the amount spent for installing of small wind turbines for residences, qualifying geothermal heat pumps and solar installations (solar water heaters and solar panels). Installations can be established on existing home as well as new construction and principle residences and second homes.

For micro turbine systems and residential fuel cells installed on principle homes, a tax credit of 30% of the expenditure incurred and up to $500 per.5 kW of power capacity is offered. In the state of Arizona, tax payers who offer energy efficient single-family residences are allowed to take a tax deduction of 5 % of the sales price of up to $5,000.

Similarly the state of New York provides a 25 percent tax credit on solar energy systems with a ceiling of $5,000 and a 20 percent fuel cell tax credit with an upper limit of $1,500. These can be carried forward for five years.

The state of Minnesota has gone to an extent of providing a 100 percent exemption for solar space heat, solar water heat, wind systems and photovoltaic.

The worth added to a property by a solar or wind energy system is exempted from property taxes in the state of Wisconsin. Home-owners, who are eligible rebates, are not liable to report it as income but can deduct its amount from their tax basis.

The initial investment on solar power systems can be recovered in a short or a long time. Factors such as the type of solar system, climate, usage and installation are taken into consideration for reaching a conclusion.

The pay-off period for solar hot water systems can be shorter when compared to others. In favorable conditions, such as good climate 3 to 4 years pay-offs are feasible however, on an average the pay-off time is 5 to 6 years. For PV solar electricity the pay-off period is much more i.e. 10 to 15 years in many cases.

There has never been a better time to go solar. With all the available tax credits it is now possible to have your solar panels system pay for itself through electricity savings in 5-6 years instead of the 25 years it would take without the tax savings.