Qualifying for the Federal Solar Tax Credit
What's the Federal Solar Tax Credit?
The Federal Solar Tax Credit, also known as the Investment Tax Credit or ITC, is a dollar-for-dollar reduction from the government allocated for solar installations. Both large-scale solar projects and residential solar alike can leverage this incentive.
As of 2020, the tax credit is 26 percent. This credit, however, is set to phase out over protracted intervals of time.
Knowledge of what this tax credit is and how to take advantage of it can save customers significantly on their electricity. One of the first things to understand is that this incentive is a tax credit, not a rebate.
Tax Credit vs. Rebate
A rebate is a fixed amount of money sent to the customer after they have purchased the product. While recipients receive the tax credit after their solar array installations, it isn't always in a lump sum.
The amount the customer receives depends on federal taxes owed. If they don't owe the full tax credit, it carries over and is applied to the following year's taxes until the tax credit is gone.
Solar Tax Credit FAQs
Tax Credit Eligibility
To qualify for the ITC, the individual needs to purchase the solar array between January 2006 and December 2021. The solar array also has to be on the owner's primary or secondary residence.
The homeowner also needs to own the solar array and be the first owner of that specific solar array. Qualifying community solar projects can't exceed typical consumption.
Can I Qualify for the ITC Without a Job?
While most working homeowners qualify for the ITC, some retired individuals also qualify. To qualify, the person purchasing the solar array needs taxable income, which encompasses more than one may expect.
Having a job is just one form of taxable income. However, it isn't the only kind: Investments and certain retirement funds also make a homeowner qualify to benefit from the ITC.
The amount of savings you earn from the credit does not hinge on the amount of your taxable income, but rather whether you have taxable income and the size of your solar array.
How the Tax Credit Pays Solar Loans
To help make solar as affordable as possible, many solar loan companies offer "balloon" payment plans. These plans have low monthly payments throughout the loan with a balloon payment equivalent to the ITC at the end of the first 12-18 months of the loan.
Once the tax credit is received, this money pays off the balloon payment. Individuals that want to use this money for other purposes can opt-in for higher payments throughout the loan instead.
Savings From the ITC
As of 2020, the ITC saves homeowners up to 26 percent of their installation costs. These include the labor, permitting, and equipment fees associated with solar installations.
Timeline of the Federal Solar Tax Credit
While the federal solar tax credit is currently at 26 percent, it will be phased down in regular intervals annually, making investing in solar sooner rather than later ideal. By 2021 it will decrease to 21 percent. After 2021, only business solar installations will be eligible for the 10 percent tax credit. However, it is likely that innovation and solar module efficiency may have improved enough at the time the tax credit is phased out to have recouped some of the loss on the tax credit's potential savings.
Countdown Until the Next ITC Phase Down: January 1, 2021
What You Can Claim in the Federal Tax Credit
Those applying for the federal tax credit can claim the permitting, installation, equipment fees, and taxes associated with the solar array. They can also claim energy storage, such as the Tesla Powerwall, as long as it is charged exclusively by the solar array.
Filing the Tax Credit
To file for the ITC, the owner of the system needs to fill out and attach the IRS Form 5695 to their federal tax return. This form is also available on online tax sites.
Can you Claim the Solar Tax Credit Twice?
While owners can only claim the solar tax credit once on the same solar array, additions or new systems by the same owner are still eligible for separate solar tax credits. That said, it's best to talk to a tax professional first.
How the Federal Tax Credit Works for Leased Solar Panels
Only those who own the solar array can claim the federal tax credit for it. While the individual leasing solar can't claim the tax credit, the solar company leasing the solar panels to the customer can. Missing out on this tax credit is one of the many reasons why buying solar is better than leasing it.
What You Need for Potential Solar Tax Credit IRS Audits
It is important to keep a copy of the IRS Form 5695. Having this form on hand and filed securely in digital format as well will make any IRS audits easy, should they occur.
How Other Incentives Affect the Federal Tax Credit
Some incentives impact the percentage of the ITC the homeowner can claim. Customers who are aware of how these incentives work together can better determine which incentives to apply to their solar arrays.
Electric Utility Solar Rebates
Income taxes often exclude utility rebates. When this is the case, these subsidies decrease the cost of the array before applying the ITC.
Renewable Energy Credits and the Solar Tax Credit
One incentive that many states have for solar is through the state's renewable energy credit trading program. Individuals who receive payment in exchange for the renewable energy credits of their solar array do not have to worry about this impacting their solar tax credit.
Influence of State Incentives
Many states offer rebates or tax credits for residential solar installations. Since these are state-funded incentives, they don't impact the federal solar tax credit.
MACRS: Its Impact on the ITC
Individuals who have a home-run business can use MACRS to offset the cost of their residential solar installation. Those who choose to use this business depreciation program are required to reduce their ITC incentive by 50 percent.
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