The Solar Investment Tax Credit Explained
Ok, before we dive in, we have to give the age-old disclaimer – We aren’t tax people, we’re solar people. Our intention with this blog is to go over the general concepts of how the Solar Investment Tax Credit works. We are in no way a guaranteeing anything in regards to how it will work for you. Everyone’s finances, and taxes, are different. We advise that you talk with your personal tax preparer or a certified tax professional about how the Solar ITC will work for you.
If you’re not sure what a tax credit is, or how a tax credit differs from a rebate, check out our post where we break it all down for you.
Now that that’s out of the way, let’s talk about the broad concept of how this thing works. The Solar Investment Tax Credit (aka: the Solar ITC) is a program of the United States Federal Government designed to encourage homeowners to invest in solar energy for their homes. With the Solar ITC, homeowners can receive a tax credit in the amount of up to 30% of the value of their solar system.
So why does the government support and reward you with a tax credit for going solar?
The answer is simple: it benefits the environment, and increases US energy security.
Solar energy is considered a clean, environment friendly source of electricity. The government is making an effort to alleviate greenhouse gas emissions and combating climate change in addition to reducing our dependence on foreign sources of energy, enhancing energy security and reducing vulnerability to energy price fluctuations.
As a tax credit, it’s a win-win situation for everyone. You get to have energy independence, and be compensated for it. The government isn’t just supporting you for being great to our environment when you go solar, they actually financially reward you for investing in renewable and safe energy.
How does it work?
Most of our homeowners qualify for between $4-15K depending on the size of their system. The catch is that it’s technically a “non-refundable” tax credit, meaning Uncle Sam won’t give you back more than you’ve paid (or owe) during the course of the year. Fortunately, homeowners have 5 years to claim the full value of the credit.
The second noteworthy thing to mention is that the Solar ITC only offsets federal taxes, not state taxes.
Ok we know, it’s confusing, so let’s break it down with a few hypothetical scenarios.
Let’s say at the end of the year you owe $10K to the federal government in taxes, but you have a $10K solar tax credit, what happens? Well, your solar credit is deducted from the overall tax bill and all of a sudden you have a $0 tax bill! If you’ve already paid taxes in withholdings through the year, the federal government now owes you that money back and gives it back in your year end tax return (not a rebate – see the difference?). That’s how it works in a general sense.
Let’s say though that you don’t pay any withholdings through the year (we’re talking to our self employed people here), in that same scenario mentioned above, rather than owing the IRS $10K at the end of the year you would now owe $0. Most of our clients that are in this boat put money aside through the year to pay their taxes, so instead of having to send that nest egg to Uncle Sam you now get to keep it! So, either way that money stays in your pocket.
What happens if your solar tax credit is more than your Federal tax bill? Let’s take the example of a solar tax credit that’s worth $15K, and a federal tax bill that totals $10K. In that case, the IRS would still subtract the solar credit from your overall tax bill and give you all of that money you paid back in your year end tax return. So, now you have a $0 tax bill with the IRS, $10K back in your pocket, and $5K left over in solar tax credits. In that case, the IRS is going to roll over any extra credits to the following calendar year. As mentioned before, every homeowner has 5 years to claim the full value of the tax credit.
What happens if you don’t have taxable income with the IRS though? Well that’s where the “non-refundable” part kicks in. Remember, you have to owe or have already paid money to the IRS for them to consider you eligible for this credit. So, unfortunately if you don’t pay federal taxes, you don’t qualify for the Solar ITC.
Solar ITC Eligibility Checklist:
There are eligibility requirements for the Tax Credit:
- Your solar system was installed in the year you’re claiming it in your taxes.
- Your solar system was installed on your primary or secondary home in the United States.
- You own the solar system, meaning you paid cash or financed it with a loan. In other words, you did not sign a lease or PPA.
- Your solar PV system is new – the credit only applies to the original installation of the solar equipment. For example, if you bought a house with solar installed, the credit would not apply.
- Your household has Federal tax liability.
What documents do I need for my tax credit?
The most important document required when filing your taxes for the solar credit is the installation agreement or contract, showing how much you paid for the solar installation. If you have a Klick system and need to get this information, just give us a call at 720-465-9073 and we can forward them along. We’re here to help!
What form do I need for my tax credit?
When claiming the Solar ITC, you will need to complete IRS Form 5695.
You can only claim the credit in the year the solar panels were installed. (Remember, please get your tax expert to help you file it!)
I hope you enjoyed this article and got some insight to help you with tax season.
Don’t hesitate to go solar if you haven’t already, here is one more reason why you should consider renewable, reliable Solar Energy! Nothing gives you better energy that continues to give back!