The Federal Solar Tax Credit or The Federal Investment Tax Credit (ITC), was passed under the George Bush administration via the Energy Policy Act of 2005. The ITC was created to facilitate the adoption of clean energy. It started as a 30% credit (which ended on 1/1/2020 when the tax credit stepped down to 26%, capped at $2,000 for residential projects, but that provision was removed in 2008.
What is the Solar Tax Credit?
The Solar ITC is a 26% tax incentive on your gross solar system cost.
The only requirements are that you:
Note, if your 26% tax credit is $6,000 total, and you only have $5,000 in personal income taxes one year, you can rollover the remaining $1,000 credit to your next year’s taxes. The federal government has already extended the incentive expiration date twice before. The most recent extension in 2016 added a “step down” schedule that gradually phases out the credit over a few years. As of January 2020, we are now in the first year of the tax credit step down with a 4% reduction from 30% to 26%.
2019 was the last year to claim the full 30% credit. As of 1/1/2020, the credit has dropped down to 26%.
Here’s the full solar Investment Tax Credit step down schedule:
*From 2022 onward, the residential portion of the Solar Tax Credit will be eliminated entirely. A 10% tax credit will remain for commercial, industrial, and utility scale projects only.
This is speculative, but we foresee a couple possible outcomes to the tax credit stepping down:
Since the Investment Tax Credit is applied to your solar array’s gross system cost, the amount you receive is dependent on the amount of solar you’re purchasing: bigger system, bigger credit.
Here’s a quick example of the difference in credits in 2019 and 2020 for a 9 kW solar array at an average cost of $27,000.
That’s a savings difference of $1,080 compared to the previous year.
While ~$1,000 may not seem like a huge difference to some, this doesn’t include the amount that you’ll save on the rest of your project if applicable. For a new roof and home batteries, for example, the cost of both can be claimed on the tax credit, adding another $300-$1,000+ to the value lost in the stepdown. If you’ve already decided to go solar and are just waiting for the right moment, you should move forward this year to maximize your savings before the ITC steps down again.
How is the Federal Solar Tax Credit Calculated?
The gross system cost can include any improvements needed to facilitate the solar installation. This includes any electrical work needed for the installation such as a panel box upgrade, and also includes roof work under the solar array. Please speak to your tax advisor for specific advice for your given circumstances.
The credit is a dollar for dollar income tax reduction. This means that the credit reduces the amount of tax that you owe. Many clients mistakenly believe that getting a tax return would make them ineligible for the ITC, but this is not the case. As long as you’ve been paying taxes in some form throughout the year, if you get a tax return and claim your ITC in the same year, your ITC is simply added to the amount of your tax return (with an annual cap of the total amount of tax liability you’ve paid into throughout the fiscal year).
How Do Solar Loans Affect the Solar Tax Credit?
There are two types of solar loan in relation to the tax credit. Type 1 has one monthly payment amount. These loans assume that you will submit your tax credit to the lender to buy down your principal and secure that monthly payment. If you do not put your tax credit back into your loan, this will initiate another loan, in the amount of your tax credit, at the same APR.
The second type of solar loan is one in which there is a different payment amount for year one than for the subsequent years. In this type of loan, your payments are based on the entire loan amount. When you receive your federal tax credit, you’ll have the option to use it to re-amortize your loan to secure lower monthly payments. You can also keep the federal tax credit, and your payments will remain the same. Solar.com can help figure out which solar financing option is best for you.
How To Claim Your Tax Credit?
To claim the ITC you will need to file under IRS Form 5695. You’ll receive your tax credit the following year when you file your taxes for the year in which you installed your panels. If you don’t qualify for the entire tax credit in the first year you can roll over the amount for up to 5 years.
Now that you have your very own solar system, the solar Investment Tax Credit (ITC) is yours for the claiming. How exactly do you go about it?
We’ll walk you through the exact, step-by-step process of filing for the federal solar tax credit.
Of course, we recommend talking to a tax professional to make sure you’re not missing anything. But if you’re a do-it-yourselfer who knows your way around a tax form (or if you’re just curious), this guide walks you through basic filing.
You will need two IRS tax forms (plus their instructions) to file for your solar panel tax credit.
You’ll also need a copy of your solar installation agreement.
Form 1040 is the standard federal income tax form. But this year, you get to fill in a few extra boxes to reduce your tax burden.
Fill in Form 1040 as you normally would. When you get to line 53, it’s time to switch to Form 5695.
Step 1: Find out how much your solar credit is worth.
Step 2: Roll over any remaining credit from last year’s taxes.
Step 3: Find out if you have any limitations to your tax credit.
Once you have this number, enter it into Line 11 of the worksheet.
Step 4: Find out how much of the remainder (if any) you can roll over into your tax return next year.
Almost done! Switch back to your Form 5695.
Step 5: Apply the amount found in Form 5695 to your tax bill on Form 1040.
You did it!
To be on the safe side, your solar project should be fully installed and paid for in 2020 to be absolutely certain that you can claim the tax credit in 2020’s taxes.
Also note that we don’t consider any of this article tax advice, and we are not tax professionals in any way. Always speak to your tax professional to get professional advice.
This may not seem like a concern in early January 2020, but the urgency increases exponentially towards the end of the year. In 2019 we actually experienced unexpected delays due to the extremely high volume of customers trying to guarantee their full 30% tax credits, so this year we recommend starting as early as possible to make sure you don’t lose out.
Even though the actual installation of a solar system usually does not take more than a single day, many homeowners do not realize that a solar project may take weeks to complete after contract signing. This is due to factors such as permitting, financing approval, utility approval, and so on.
Therefore, to be 100% sure that you can claim the 26% ITC, the sooner you move forward with your project, the better.
Towards the end of the year as word begins to spread about the incentive stepping down, solar installers will definitely get busier and busier, meaning your installation may be scheduled farther out than normal.
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