Solar Tax Credit

Since 2005 the government through the Energy Policy Act has come up with incentives to encourage the uptake of clean energy. The federal solar tax credit is just one of these incentives. This solar tax credit decreases the annual tax liability for those who take it up with the government extending it three times so far.

The new tax credit includes an increase in the percentage amount that Americans are eligible for. It is now up to 30% from the previous 26% applicable to the year 2020 and 2021.

What exactly is the solar tax credit?

The credit is simply a tax reduction that you’re entitled to by going solar. It is an incentive given by the federal government to encourage the uptake of solar energy. The new federal solar tax credit is 30% of the cost of your installation. If you install your solar photovoltaic (PV) system between now and 2032 you’re eligible for this tax credit.

There’s a lot that you need to understand about the new tax credit. This article will give you a great understanding of the credit and how you can take advantage of it.

Eligibility

Let’s talk about who can actually take advantage of this solar panel credit. While not for all, most Americans are eligible for this credit. These are some of the requirements:

· You’re a taxpayer

The incentive works by reducing the annual income tax liability for taxpayers.

· Ownership of the solar PV system

You are the actual owner of the solar PV system having purchased it through financing or cash payment. The solar tax credit does not apply where you have leased a system as you aren’t the actual owner. Similarly purchasing electricity from a solar company doesn’t qualify you for the tax credit.

Some people live in condominiums or may be tenant-stockholders at cooperative housing corporations.  In such cases, where a solar PV system is installed and members contribute to the costs, they’re eligible for the credit. The amount contributed would be used to calculate the credit applicable to each member.

Finally as far as ownership is concerned, a renter cannot claim a credit should their landlord install a solar PV system.  As they’re not the owner of the system, they do not get this benefit.

· When the system was installed

Congress approved the new federal solar tax credit in August of 2022.  It raised the existing tax credit to 30% for systems installed between 2022 and 2032. Prior to this was a 26% credit for systems installed in the year 2020 and 2021. This new tax credit runs until 2032 after which it will decrease to 26% in 2033 and 22% in 2034. It is expected to expire beyond this period unless Congress renews it.

· Type of property

The solar credit only applies to installations on residential properties within the United States. It could be your primary residence or your secondary residence. However if you do an installation on a commercial property, you’re not eligible for the tax credit.

· First-time use

The solar PV system you have must be new or you’re using it for the first time. The federal credit is claimed on the original installation only.

How much do I qualify for?

The solar panel tax credit offered between 2022 and 2032 is 30%. This means that 30% of whatever you spend on purchasing and installing the system is knocked off your annual income tax.

Say that you spend $35,000 on your purchase and installation of a solar PV system. 30% of this is $10,500. If you owe $11,000 as your annual income tax, the tax credit reduces the amount you owe by $10,500. Thus you’ll only owe $500.

Cost of purchase and installation = $35,000

Solar tax credit applied = 30% x 35,000 = 10,500

Annual income tax = $500

Annual income tax owed after applying solar tax credit = 11,000 – 10,500 = $500

What if my taxes are less than the solar panel tax credit?

It is possible to owe less tax than the amount that you’re eligible for as a solar tax credit. For example, you may be eligible for a $10,500 tax credit yet you only owe $5,000 as your taxes. The solar credit will cancel out your taxes and leave a balance of $5,500.

Annual income tax = $5,000

Annual income tax owed after applying solar tax credit =$ 5,000 – $10,500 = $5,500

What happens to this $5,500? It is a benefit that you’re entitled to but cannot claim in that year. Do you lose out on this amount?

No you don’t. While the government won’t refund you this extra amount, you can carry it forward. Current guidelines stipulate that solar tax credits can be claimed for as long as the Residential Clean Energy Credit is active, which ends on December 31, 2032.

People eligible for tax refunds

Sometimes you’ll find that you’ve paid more taxes than you owed. In this case, you’d get a tax refund check. What happens when you also qualify for the tax credit?

For example, if you owed taxes of $20,000 and paid $25,000, the government would refund $5,000 to you. Then in the same period, you’re entitled to a federal solar credit of $10,500. What would happen?

The $10,500 credit would be deducted from the income tax that you owed.

Taxes owed = $20,000

Taxes owed less solar tax credit = $20,000 – $10,500 = $9,500

Thus your tax liability for the year would be $9,500. However you had already paid your $25,000 as your taxes for the year. This makes you eligible for a tax refund of:

Taxes paid = $25,000

Taxes owed = $9,500

Tax refund to be received = $25,000 – $9,500 = $15,500

Thus you’ll be eligible for a tax refund of $15,500.

Expenses that are covered by the federal solar tax credit (also see bundle below)

  • The first is the solar PV panels and the solar PV cells. Solar photovoltaic panels are the flat window-like panes that convert the sun’s energy into electricity. The solar PV cells then store this electricity.
  • Secondly you’ll include the costs of installation. Solar installation is not really a DIY project and you’ll definitely need professional help. This’ll include contractors who’ll do the onsite installation and their fees, developer fees, and inspection costs.
  • Additionally the solar panels require equipment to hold them in place and transfer the electricity to the cells. Thus included in applicable costs will be equipment required to balance the system such as wiring, inverters and mountings. Contractors will advise you on all the equipment necessary for successful installation.
  • As a solar PV system owner you’ll have purchased energy storage devices. This cost is also eligible for the tax credit if the storage device has a 3 kilowatt-hours rating or higher.
  • Were you charged sales tax on the equipment that you purchased? This is also an allowable expense when you’re calculating your federal solar tax credit.

You’ll total all these and then calculate 30% of the total costs. That’s what you’ll be eligible for as a solar panel tax credit. Remember that there is no dollar limit on your expenses here. You’re eligible for the 30% solar tax credit whether your expenses are as low as $20000 or as high as $120,000. See Bundle Financing below.

Frequently Asked Questions

Q. How does the federal solar tax credit affect my state’s solar incentive?

Different states offer different incentives for the uptake of solar energy. How the federal tax credit affects the tax credit in your state will depend on what state you are in. In some states, the state credit reduces once you take up the federal credit while in others nothing is affected. Consult your state website to know how the uptake of the federal credit affects your state credit.

Q. Will the solar tax credit be affected if I receive a utility company rebate for installing a solar PV system?

You’ll have to take into account the rebate before calculating your tax credit for the year. Say you electric utility company gives you a $1500 rebate for installing solar PV panels. Then your cost of installation comes to $35000. You’ll first deduct your utility company rebate before calculating your solar panel tax credit.

Cost of installing solar PV panels = $35,000

Electric utility rebate  = $1500

Federal solar tax credit = ($35,000 – $1,500) x 30% = $10,050

Q. How do I apply for the federal solar tax credit?

When completing your federal taxes you’ll need to complete and attach IRS form 5695 and submit it.

The tax credit is thus an awesome incentive from the government to encourage the uptake of clean energy. It decreases your annual income tax liability significantly. There is no maximum limit on the amount you qualify for. Thus you’re able to get a good quality system, apply all the costs of installation and calculate your tax credit on the cost.

Bundle Financing

AZ Green Energy Solutions can arrange for low financing up to 25 yrs. You could bundle a solar panel system, a new roof, insulation-duct sealing, and turf or pavers into one loan. And you would receive a 30% tax credit on the total cost. In order to qualify for this bundle, the cost of any added items may not exceed the cost of the solar panel system.

Example $35,000 solar system | Added items $15,000 new roof, $5,000 insulation and duct sealing, and $7,000 in pavers and turf (total of added items $27,000). This example would qualify for a the bundle loan, and an $18,600 tax credit.

Do You’re Due Diligence

Please check with your tax preparer / accountant, or CPA.

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