All About Federal Solar Tax Credit

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So, you heard that you could save up to 30 percent on solar tax credit if you decide to install the solar system at your home. We have to confirm that the provided information is true and that you have the right to use this benefit when you implement solar construction on top of your household roof.

What is the Solar Tax Credit?

The Federal Investment Tax Credit (ITC), or as it’s also called the Federal Solar Tax Credit was created under the George Bush administration with the purpose to facilitate the adoption of clean energy usage. This was part of the Energy Policy Act of 2005, and it all started as a 30 percent credit for residential projects capped at $2,000.

Today, ITC presents hope for all enthusiasts who want to make some changes in their lives and to give their contribution regarding the matter of taking care of the planet. Basically, it is a 30 percent tax incentive on the gross cost of your household solar system.

In order to get the solar tax credit, you must have ownership of your solar system that has been purchased by solar loans or cash. Those with PPA financing or lease won’t be able to claim it. Also, you have to have an income tax liability because that is what this incentive reduces.

Solar Tax Credit met the expiration date

It seems like ITC has been quite a motivation for a considerable number of people over the previous years because the federal government decided to extend the incentive expiration date twice already. The bad news is that the latest resolution from 2016 says there is a schedule that will gradually phase out this credit over the next couple of years.

As a matter of fact, 2019 is the last year when U.S citizens will be able to claim a full 30 percent tax credit. From 2020 they will have right only on 26 percent, the year after that one, the number will be 22, and from 2022 the residential portion of the solar tax credit will be entirely eliminated. Only commercial and industrial projects will be able to get 10 percent.

How to calculate and claim Solar Tax Credit?

First of all, you need to take into account the whole system cost, which can include everything necessary to set up and improve solar installations. It would be good to consult with your tax advisor about the specifics, but most things, including electrical work, should be covered.

The credit is based on this rule – a dollar for dollar income tax reduction, which means that it actually reduces the entire amount of taxes you have. In order to get this benefit, you have to file under IRS Form 5695. If you do everything right, you will get your tax credit the year that’s following the one when you installed and paid for your solar system.

Take two IRS tax forms with their instructions – form 1040 and form 5695, and carefully fill all the necessary lines and gaps. The first one is a standard federal income tax form with some extra boxes you have to mark to reduce your tax bill. The most important thing is to write down the full amount of money you invested in getting your solar system set up on your roof. That includes the cost of solar panels, as well as the prices associated with the installation and other materials.

Then take that amount and multiply it with 30% (.30). The number you got is your solar tax credit. The next step is to find out if you have any kind of limitations regarding the tax credit and how much of a reminder, if you even have any, you can rollover into your tax return next year.

The entire procedure might seem a bit complicated, but if you read the instructions carefully and consult with tax professionals, you should figure it all out. Only that way you can come to the amount of the credit you can claim this year.

Do the math

Given that the Investment Tax Credit takes into account the gross cost of a solar system, you can get the proportional tax credit to that sum. That means that the credit amount depends on the size of a solar system you are purchasing. The bigger system implies a bigger credit.
But don’t forget about the changes the future is bringing. For example, if you claim the solar tax credit for the amount of $30.000 in 2019, you will get $9.000 tax credit. But if you do the whole thing for the same amount next year, the credit will be $7.800. It’s not an insignificant difference, so make sure to maximize your savings if you can and if you still got time.

How Solar Loans affect Solar Tax Credit?

You need to know that there are two types of solar loans that are significant to the solar tax credit. The first one is based on the assumption that you are going to submit your tax credit for each monthly payment. In case you don’t do that, you will have to initiate another loan in the tax credit amount.

The other solar loan is organized in a different way – you have different payment schedules for year one then for all others. It’s based on the entire amount of a loan. So you have an option to submit the federal tax credit and to re-amortize your loan to lower monthly payments, or you can keep it, and your payments will remain the same.

 

How to make sure you are eligible to claim the Solar Tax Credit?

If you are planning on claiming the right for Solar Tax Credit in 2019s taxes, you have to make sure that you buy and install the entire solar system this year. Given the end of the year is quite close, this might be a challenge. Even though the whole process of setting up the construction is usually finished in a day or two, many tend to forget it may take weeks for the solar project to be completed, after contract signing.

So be sure you are right on schedule. Don’t leave it for later if you already decided this is the right step for you and your family. And bear in mind one more thing. You are not the only one who is aware the next year will bring smaller solar tax incentives, so there are probably more people hurrying up to do the work in this short period. That means the installers will be pretty busy, and you may find yourself in a situation where you did everything right, but you didn’t get to hire the workers in time.

What will happen after 2022?

We can only speculate since there are no official statements or strategic planning. But if the tax credit is no more an option after 2022, states might take charges. There are states like California that launch 100% Renewable Portfolio Standard (RPS) targets, so homeowners in those areas might get some sort of incentives.

If, however, Congress takes the matter in its own hands, there is a chance they will adjust this stepping-down schedule in the future, just like they did in the past. That mostly depends on government politics, so it’s quite uncertain.

Conclusion

Even if everything stays the same as the government officially announced, there is still time for you to put your house and finances in order, and claim the right you have. Since it’s almost the end of 2019, and we know the next year will bring incentive conditions that are not so ideal, it’s understandable that you are a bit frustrated. But it’s not the end of the world.

You can still get excellent support regarding your decision to go solar, and therefore save a significant amount of money. Just don’t wait any longer. If you thought about it well, did your research and calculations, make a move. The time for these kinds of huge ventures is now.