The Federal Solar Tax Credit: What You Need To Know
Could investing in solar energy pay off sooner than you think? The short answer is, yes. Many residential home solar power systems are eligible for a federal investment tax credit, or ITC.
At the time of this writing, you can get up to 26% of your installation costs back by claiming the tax credit when you file with the IRS. The ITC benefits both residential and commercial customers, and there is no cap on its value.
Wondering how the solar tax credit works in 2021? Well cover everything you need to know in this post.
Lets dive in.
A Simple Guide For Claiming Federal 30% Tax Credit For Solar Installation
In December 2015, the federal government extended a renewable energy tax credit that allows a taxpayer to claim a 30% credit of qualified expenditures that serves a residence unit used by the taxpayer. The ITC offers an income 30% credit for systems placed in service by December 31st 2019. Simply put, the federal government rewards individuals with a tax credit for investing in solar energy.How Much Money Can One Save With The Federal Tax Credit?At the moment, the tax credit amounts to 30% of your total solar system cost. This includes the contractor fees and value of parts used in the installation. For example, if you spend a total of $20,000 to install your solar system, you would be owed a $6,000 credit. This claim is only eligible for people who own their systems. When you install solar panels, other than enjoying the tax credit, you still get the benefit of cheap, renewable energy.How To Claim The Federal Tax CreditYou have a part to play to ensure that you get your hands on the tax credit. The first thing you need to do is ensure that you keep all your receipts from the start. Be careful to keep track of everything. Some of the expenses you are allowed to claim include:
- Permitting service costs
- Wiring, nails, bolts, screw, etc
- Tools bought or rented
Next, in order to claim the tax credit, you need the following:
- IRS Form 5695 for 2017
- IRS Form 1040 for 2017
- Receipts for your solar installation
You need to purchase and own the solar system
What Qualifies For The Solar Tax Credit
The entire bill for a qualified solar energy system, minus the sales tax, qualifies for the solar tax credit. That includes the solar panels, labor costs for on-site preparation, assembly, permits, installation, racking, and piping to connect and activate your solar energy system for your home.
- Installation of a solar system in your primary home residence
- Solar energy systems that are purchased to own or with a loan.
- Solar roofing tiles like the Tesla solar roofs
- Home solar + battery storage system or add-on solar battery storage system
You must have Federal income tax liability at least equal to the value of the tax credit across the next three years.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
One: Determine Eligibility For Solar Tax Credit
Before you can claim your federal tax credit for solar, you need to make sure youre eligible to receive it. Its best to determine eligibility at the start of your residential solar installation project, as youll need to save all related receipts in order to claim your credit.
For homeowners, determining eligibility is easy. You likely qualify for the federal tax credit for residential solar energy if you meet the following criteria:
You have taxable income
You own your solar panel system
You own the property your solar system is installed on
Your system is located at and generating electricity for your primary or secondary residence, located in the United States
If your solar panels are installed at a property that you rent out, things get a little more complicated. If you live at the residence for some portion of the year, you can still claim the credit, but it will be reduced. In these situations it is best to speak to your tax advisor.
Its also important to note that, because the tax credit is on a declining schedule, the date your installation is completed and switched in service affects eligibility. For projects completed in 2020 through 2022, homeowners are eligible for a 26% tax credit, thanks to a recent extension of the solar tax credit. However, that number will drop to 22% in 2023 and then eliminated in 2024. To receive the current 26% credit, your system must be installed and placed in service by December 31st, 2022.
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How Do You Claim The Solar Tax Credit
Every time someone mentions solar, does the Solar Tax Credit come up? Also known as the Investment Tax Credit , the Federal ITC makes solar more affordable for homeowners and businesses. This credit grants a dollar-for-dollar tax deduction equal to 26% of the total cost of a solar energy system. Its no wonder its such a hot topic in the solar industry.
With so much information about the benefits of the ITC, its unfortunate that figuring out how to actually claim the credit is so rarely talked about. At Sun Energy California, we want our customers to be knowledgeable about every part of solar ownership. Heres a walk-through on how to claim it:
1. The Solar Tax Credit is currently a dollar-for-dollar tax deduction equal to 26% of the total cost of a solar energy system. 2. Claiming the federal ITC involves determining your tax appetite and filling out the proper forms.3. The federal ITC steps down to 22% at the end of 2020, and goes away after 2021.
Incentives Offered By The State Of California
Currently, the state of California does not offer incentives or refunds to install a solar panel system. The good news is that there is a discount to install an energy storage system called the Auto generation Incentive Program ! This can be claimed along with the California solar tax credits. California Governor Brown SB recently signed 700. This adds some $ 800 million of additional funds to SGIP and expands the program until 2025.
The California energy storage reimbursement program was established in 2001. Until recently, the application of SGIP has been a difficult process, especially for residential customers. The previous reimbursement worked by providing program funds on a specific day. With most of the funds allocated to large industrial energy storage projects. Leaving little available for homeowners looking to store their solar energy. For homeowners who are customers of GDS & E, PG& E, SCE and SCG are eligible for an incentive of up to $ 400 per kilowatt hour when sending a domestic battery. This great incentive has the potential to cover most of your battery costs. The battery size will determine the value you will get per kilowatt.
Before you go, I hope this summary about the question, California have a solar tax credit? is helpful for you.
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Looking Forward: 2021 Is An Excellent Time To Install A Solar Power System
The incoming Biden Administration has announced an ambitious 100-day energy agenda known as The Solar Vision. Under this plan, the Biden Administration wants to extend the solar tax credit so that it includes standalone battery storage systems.
People who live in California can also take advantage of the California Self-Generation Incentive Program, or SGIP. This initiative supports distributed generation and offers rebates for energy storage and generation projects throughout the PG& E, SDG& E, SCE, and SoCalGas territories. SGIP targets low-income, medically vulnerable, and disadvantaged customers in these areas.
Recently, the SGIP program was extended to include customers who live in high fire-threat districts or those who have been subject to at least two Public Safety Power Shutoffs. The extension of the program helps eliminate financial barriers and increase access to battery backup systems for qualifying customers.
Despite recent extensions, the ITC started decreasing in 2020, and it will continue to fall over the coming years.
With that in mind, property owners who want to maximize their ITC deductions should install their solar systems before the end of the year. Dont forget the ITC relies on the date your system is placed into service , not the date you install it.
Eligible Installations And Tax Credit Rates
Individuals cannot apply for the Iowa credit for residential installations until the installation of the solar energy system is complete.
Qualifying installations must meet the criteria for the federal residential energy efficient property credit related to solar energy provided in sections 25D or 25D of the Internal Revenue Code. The credit amount for a residential installation that occurs after January 1, 2016, is equal to an applicable Iowa credit rate up to $5,000. Residential installations placed in service after December 31, 2021, are not eligible for the Iowa credit. Any residential tax credit request that does not receive a tax credit award during the 2021 award year shall expire under Iowa law and shall not carry forward on the waitlist to future years. Submitting an application before the residential tax credit expires at the end of 2021 is no guarantee a taxpayer will receive an award, as described above.
For additional information about the Iowa solar energy system tax credit, please consult Iowa administrative rule 701-42.48.
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How To Calculate The Federal Solar Tax Credit
The total amount of the tax credit is calculated easily. You can calculate the tax credit amount by taking thirty percent of the solar energy systems total cost.
If you install your system in 2021, a solar energy system that costs $20,000 would have a tax credit that would be $20,000 x 22%= $4,400.
If you install solar in 2022, the solar tax credit will decrease to 0%. So for the same system that costs $20,000 your tax credit in 2022 would be $20,000 x 0% = $0.
How Other Solar Incentives Affect How Much You Can Get Back
Along with the federal solar tax credit, there are a number of rebates, programs and state tax incentives that you may be eligible for depending on where you live. In some cases, these other financial incentives may impact your federal tax credit. Here’s what you should know:
- Rebates from your utility company: Typically, subsidies from your utility company are excluded from income tax returns. In these situations, the rebate for installing solar must be subtracted from your system cost before you can calculate your tax credit.
- Rebates from state-sponsored programs: Rebates from the state government generally do not reduce your federal tax credits.
- State tax credits: Any state tax credits you get for your residential solar system will not decrease federal tax credits. With that said, getting a state tax credit means the taxable income you report on your federal returns will be higher, as you now have less state income tax to deduct.
- Payments from renewable energy certificates: Any payments you receive from selling renewable energy certificates will likely be considered taxable income. As such, it will increase your gross income, but will not reduce your tax credit.
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What Does The Credit Cover
Homeowners who install and begin using a solar PV system can claim a federal solar tax credit that currently covers 26% of the following costs:
- Labor costs for solar panel installation, including fees related to permitting and inspections
- All additional solar equipment, such as inverters, wiring and mounting hardware
- Energy storage devices that are powered exclusively through the solar panels, including solar batteries
- Sales taxes paid for eligible solar installation expenses
Qualifying For Solar Energy Credit
Any owner of a solar energy system may qualify for solar tax credit. If an owner does not have enough tax liability to claim the entire credit in one year, the owner has the ability to use those remaining credits in future years. By rolling over the remaining credits, the owner will be able to receive full benefits from claiming tax credits. Before inquiring about solar credit, check to see if your solar panels have been issued through a lease or PPA of installer. If the owner is on a lease or PPA, then the owner would not be eligible for tax credit due to not being the proprietor of the system.
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How To Claim The Solar Tax Credit
Tax season is upon us once again, and for new home solar panel owners, that means its time to claim your solar tax credit.
Claiming your solar panel tax credit is a fairly straightforward process, but with multiple forms to fill out and calculations to be done, it can get a little confusing. To help simplify things, Boston Solar has put together a step-by-step guide to claiming the Federal Solar Investment Tax Credit for homeowners. While we are here to help you, we also always recommend you speak to your tax advisor to review and confirm how solar energy tax credits apply to your personal tax situation.
Solar Tax Credit Step Down Schedule
2019 was the last year to claim the full 30% credit. As of 1/1/2021, the credit has dropped down to 26%.
Heres the full solar Investment Tax Credit step down schedule:
*From 2024 onward, the residential portion of the Solar Tax Credit will be eliminated entirely. A 10% tax credit will remain for commercial, industrial, and utility scale projects only.
What Exactly Is A Solar Energy Credit
A solar energy credit, or more formally a solar investment tax credit , is not a tax rebate and is not a deduction. While a rebate pays you back, a credit offsets the balance of tax due on your tax return. So, if you owe little to no federal taxes there is little to nothing to offset, and you wont be able to take full advantage of the credit.*
Tips When Considering Solar Energy Systems
Investing in solar energy is an important fiscal decision. Business owners should research as many solar energy options as possible. For some, leasing or a Power Purchase Agreement may be a better option for organizations with less cash or capital to invest.
Get the most out of solar for your business with the Solar Federal Investment Tax Credit!
Ready to find out how to get your solar project started as soon as possible, or want to talk to one of our solar energy advisors about ITC eligibility?
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Three: Add Renewable Energy Credit To Form 1040/schedule 3
Now that you know how much your solar federal tax credit is worth, you need to add that information to Form 1040/Schedule 3. On line 5 of Schedule 3, write in the same number that you wrote for line 6 of Form 5695in our example, $7,800.
And thats it, youre done! Just remember to attach Form 5695 when you file your taxes.
In our example, you would receive a dollar-for-dollar tax credit for $7,800, which means you would be able to reduce your federal tax liability by that amount. If the credit is worth more than you owe, you can rollover the remainder and apply it to your federal taxes in the following year.
*DISCLAIMER: While this blog post discusses solar tax credits and filing your returns, you should ALWAYS consult your tax professional for your specific situation. We do not assume responsibility for your tax situation or credits.
Have questions about how the federal solar tax credit works? Boston Solar has the answers. Give us a call at 617-858-1645 or get in touch here.
What Is A Tax Credit
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC, though is different from the ITC offered to businesses that own solar systems.
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How Is The Federal Solar Tax Credit Calculated
The gross system cost can include any improvements needed to facilitate the solar installation. This includes any electrical work needed for the installation such as a panel box upgrade, and also includes roof work under the solar array. Please speak to your tax advisor for specific advice for your given circumstances.
The credit is a dollar for dollar income tax reduction. This means that the credit reduces the amount of tax that you owe. Many clients mistakenly believe that getting a tax return would make them ineligible for the ITC, but this is not the case. As long as youve been paying taxes in some form throughout the year, if you get a tax return and claim your ITC in the same year, your ITC is simply added to the amount of your tax return .