Tax rate effects on your investments in self-owned renewable energy systems

What does my tax status have to do with my investments in residential renewable energy?

Your tax status has everything to do with your personal investments in renewable energy! Your tax status is a very important consideration in looking at renewable energy investments at the personal level. In order to effectively compare investments in home based renewable energy systems and their financial returns to other investments that you have, you have to consider the effects of tax. We'll use as our reference frame the amount of cash return you have after taxes from a home solar system to the return from a savings account (This example can be extended to stocks and bonds as well).

You can separate the investment world into many categories. One division is taxable investments and non-taxable investments. If you are a regular citizen, then most of your investments are taxable, unless you are looking at US savings bonds, municipal bonds, or other tax free government debt. That means that need to consider your tax rate and its effect on your investments.

Since our tax system in the US is progressive, the logical approach is to consider your marginal tax rate, and to 'correct' your pretax returns from investments to 'posttax' returns. You can do the conversion like this.

Posttax return (%) / (100 % - marginal tax rate %) = Pre tax return (%)

or

Pretax return (%)* marginal tax rate % = Post tax return (%)

Examples

To put some numbers on this example, let's look at your solar electric (PV) system that returns 8% annually to you. We'll define that return as electricity savings/(total effective cost of system - rebates - tax benefit). That is typical of solar electric systems in Pasadena, CA. Marginal tax rate will be 35%, which is very middle class in California's tax brackets.

To get a comparable financial return from a stock or bond, you would need 12.8%, which is actually quite close to the stock market's long term performance. The tax implications of investing are very important to consider in high tax countries. These effects have an even greater impact in Germany where I also design solar systems.

The next question for you as a homeowner is why not invest in a solar system that has a bond's stability, has a growing yield over time, and compares to exceeds stocks' long term performance?