The Federal Tax Credit for Solar Energy installations is the largest incentive offered for both residential and commercial systems since 2006. It has allowed for tremendous growth in solar installations for both homes and businesses.
Up until December 31, 2019 the Federal Tax Credit is calculated as 30% of the net cost of the system (excluding state and local subsidies). This means for a $30,000 solar system, $9,000 of that can come back on your personal tax return. For a $300,000 commercial system, that would be $90,000.
When combined with other solar incentives and electrical savings, a great amount of the system’s cost can be eliminated within the first few years of ownership.
Highlights of Federal Tax Credit for Solar Systems
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
- There is no maximum credit for systems placed in service after 2008.
- Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2021.
- The home served by the system does not have to be the taxpayer’s principal residence.
Explanation of the Federal Tax Credit
Tax credits reduce the amount of income tax you owe to the federal and state governments. Credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy, the environment or to further any other purpose the government deems important. In most cases, credits cover expenses you pay during the year and have requirements you must satisfy before you can claim them.
Some people are under the impression that the 30% Federal Tax Credit available to those who invest in a solar system for their home or business is a cash rebate. It is not. Here are a couple of things you need to know at tax time.
A Tax Credit is a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero.
So how does the solar tax credit work? Let’s take the example of a typical residential solar PV array of 8 kilowatts (kW). Let’s estimate that the cost of this 8kW system, including installation, is $24,000. Thirty percent of that cost, which would be the Federal Tax Credit, is $7,200. This means when you file you have a $7,200 Federal Tax Credit by which you can lower the income tax you owe.
It is very important when evaluating a Solar Loan or Cash purchase that you know what your average yearly tax liability is so you can be confident you will be able to receive that 30% back after you file (and put it towards your solar investment). For example, if you earned a $7,200 Federal Tax Credit from solar but only have a yearly tax liability of $1,000, it can take you over 7 years to earn that credit back. However, if you have a yearly tax liability of $14,000 then that $7,200 directly reduces your tax liability and you are able to receive the credit.
In generic terms, you have to be paying taxes to have a tax credit make sense.
It is also important to realize that even if you are not paying extra tax payments when you file, you are very likely paying Federal Income Tax on each of our paystubs throughout the year. All these tax payments throughout the year get compared against your end of year tax liability. So if you overpaid (which is likely when you go solar), you receive that credit back after you file.
Don’t Just Take Our Word For It
Helpful Videos on Tax Credits
Please be advised that we are not tax experts. You should always consult with a tax professional.
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