Original Article: https://www.ecowatch.com/federal-solar-tax-credit-2654636766.html
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One of the biggest obstacles to going solar is the initial cost of solar panels. However, incentives like the federal solar tax credit can take thousands of dollars off your initial investment.
Homeowners who wish to install a residential solar system may have sticker shock when they find out what they’ll need to spend in order to get the right equipment. In this article, we’ll break down the federal solar tax credit, also called the investment tax credit (ITC), and help you understand whether you qualify for the credit and how much you can get back.
Disclaimer: This article is for informational purposes only. It should not be relied on for and is not intended to provide accounting, legal or tax advice.
What Is the Federal Solar Tax Credit?
The federal solar tax credit is a tax credit that you can claim on your federal returns. This tax credit is not valued at a set dollar amount; instead, it’s a percentage of what you spend to install a residential solar photovoltaic (PV) system. The tax credit is currently 26% of your total system cost.
Tax credits help to reduce the amount of money you would otherwise owe on your income tax returns. So, for example, if you claim a tax credit of $4,000, the total amount you owe on your income taxes will go down by $4,000.
The federal solar tax credit can be claimed by any U.S. homeowner, so long as the solar system you install is for a residential location based in the United States. (It does not have to be your primary residence.)
The system must be placed in service (in other words, it must be “turned on” and generating power) during the tax year. So, if you install and begin using a residential solar system during the year 2021, you’ll claim the credit on your 2021 tax filing. If you start a solar panel installation in December of 2021 but don’t turn the system on until January of 2022, you’ll claim the credit on your 2022 filing.
Exactly how much is the federal solar tax credit worth? Right now, the credit is being phased out, which means its value is steadily decreasing. Unless Congress renews the credit, it will eventually be phased out completely.
|Year Placed in Service||Federal Solar Tax Credit|
|2019 or prior||30%|
|2020 to 2022||26%|
|2024||Credit set to expire for residential systems|
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:
- Cost of solar panels
- 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 (though some of the top states for solar tax incentives waive sales tax on PV system equipment)
History of the Federal Solar Tax Credit
The solar tax credit was originally created through the Energy Policy Act, which was signed way back in 2005. As originally written, the credit was set to expire in 2007. It proved pretty popular with homeowners across the country, however, prompting Congress to renew the credit multiple times.
As it stands, the credit will be available at least through 2023. However, an act of Congress could extend it even further, allowing future homeowners and solar adopters to reap this financial benefit.
Are You Eligible to Claim the Federal Solar Tax Credit?
In order to claim the federal solar tax credit and get money back on your solar investment, you have to meet the following criteria when filing your 2021 taxes:
- Your solar PV system must have been installed and began operating at some point between January 1, 2006, and December 31 of this year.
- Your system must be installed at either your primary or secondary residence.
- You must own the solar PV system, whether you paid upfront or are financing the cost. (If you’re leasing your system, you won’t be eligible for the tax credit.)
- The solar system must either be brand new or have been used for the first time. You only get to claim this credit once, for the “original installation” of your solar PV equipment.
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.
How to Claim the Solar Investment Tax Credit
Claiming the federal solar tax credit simply involves completing IRS Form 5695 and submitting it with your annual tax return. This form can be downloaded straight from the IRS. Alternatively, if you use a tax preparation service or tax professional, they can assist you in completing this form.
Frequently Asked Questions: Federal Solar Tax Credit
Will I get a tax refund if the solar investment tax credit exceeds my tax liability?
No, the federal solar ITC is a nonrefundable tax credit. However, if you do not use all of your tax credit, you can carry over the unused amount to the following year.
Can I use the federal solar tax credit against the alternative minimum tax?
Yes, you can use your solar tax credit either against the federal income tax or against the alternative minimum tax.
Will there be another federal solar tax incentive after the current one expires?
A new solar tax credit would require an act of Congress. While it is certainly possible, it isn’t something that can be predicted with any certainty.
Can I claim the credit if I’m not a homeowner?
Yes, but only under specific circumstances. Specifically, you must be either a tenant-stockholder at a cooperative housing corporation or a member of a condominium complex to claim the federal solar tax credit.
Can I claim the credit if I am not connected to the grid?
You do not have to be connected to the electric grid to claim the solar tax credit. You only need to have a solar power system that’s generating electricity for your home.
Can I claim the credit if my solar panels are not installed on my roof, but on the ground on my property?
Yes. The solar panels do not have to be installed on the roof in order for you to claim the tax credit, just so long as they are generating solar energy for your home.