How Does the Solar Tax Credit Work? 4 Critical Facts to Know

By Gabriela Covay | The Latest Solar Energy Information

Could investing in solar energy pay off sooner than you think? Many residential home solar power systems are eligible for a federal investment tax credit, or ITC. You can get up to 30 percent of your installation costs back by claiming the tax credit when you file with the IRS.

Just how does the solar tax credit work? Here’s everything that you need to know to get started.

What Is the Tax Credit for Solar Energy?

The Residential Renewable Energy Tax Credit was designed to promote cleaner forms of power generation. According to the U.S. Department of Energy, or DOE, the program has been around since January 2006. To apply, homeowners simply fill out their 1040 tax forms as usual and supplement them with Form 5695.

  1. What Kinds of Home Solar Power Systems Are Eligible?

This ITC applies to a range of renewable devices. For solar power installations, such as panels mounted in your yard or on your roof, the system must meet the following requirements:

  • Adhere to fire and electrical code
  • Provide electricity to a personal residence that you own
  • Have been placed in service between Jan. 1, 2006, and Dec. 31, 2021

These rules don’t require your solar installation to power your principal, or main residence. If you improve a second property that you also live in, you can still claim the ITC. You can also claim the 30% credit that you’re constructing with solar systems. No matter which route you choose, you’re better off finding solar energy installers who can help you plan a project that satisfies the rules.

  1. What’s Actually Covered?

The renewable energy ITC applies to “qualified expenditures.” In plain English, this means that you can calculate the amount of your claim based on costs such as:

  • Preparing the installation site which can include things such as service upgrades to your existing panel and the cost of replacing the section of the roof under the solar system array
  • Wiring the solar panels to your home, and
  • Installing and assembling the solar system.
  1. How Much Will I Get By Claiming the Solar Tax Credit?

This ITC allows you to claim tax credits that amount to as much as 30 percent of the qualified costs of installing renewable energy systems on your property. As filing professionals note, this credit reduces your overall tax liability.

This means that if you spend a total of $20,000 on your home solar panel system’s installation, then you could be eligible for a credit of 30 percent, or $6,000. Since the credit applies to your total tax liability, you’d subtract that $6,000 from whatever you owed at the end of the year and pay the remainder.

The solar ITC is a one-time credit, but one of its cooler features is that you can carry over the excess to the next year if you can’t use it all when you file. For example, imagine that you only owed $5,000 in taxes but received the $6,000 home solar credit from the previous example. You’d pay $0 in taxes for the year when you placed the claim. You’d also get to reduce your next year’s taxes by the remaining $1,000.

Credits Decrease Starting in 2020

The 30 percent credit won’t last forever. Currently, the DOE plans on reducing the rate to 26 percent on Jan. 1, 2020, and it will drop to 22 percent on Jan. 1, 2021.

What will these changes mean for property owners? In short, you’ll get the biggest tax benefit by going solar before the end of 2019.

Also, remember that the ITC reflects the date when your system goes into service, not when you purchase it. If you start installing a system on the last day of the year but don’t complete it until January, then you’ll have to wait until next year to claim. Make sure that your installer can help you get the timing right.

  1. Are There Limits?

The rules for claiming solar tax credits have gradually evolved. For instance, the program originally included maximum limit caps. Since 2009, however, homeowners have been able to claim 30 percent of all qualified costs. The ITC was also set to expire in 2016, but the U.S. Congress expanded it until the current 2021 stop date.

The ITC is only designed to last for a limited time. Currently, you can combine it with initiatives such as California’s Self Generation Incentive Program to drastically lower your solar panel installation and energy storage costs, but the clock is ticking.

Are You Prepared to Claim the Solar Tax Credit?

The solar tax credit is an important program because it incentivizes smarter investment in America’s shared energy future. As an individual homeowner, it makes sense to get involved early so that you’ll obtain the biggest savings. Still, it’s important to take your time when planning an installation so that you can get a high-quality, lasting product at a fair price.

The Sandbar Solar team loves helping Californians discover how to get the greatest rewards from solar technology. As the Central Coast’s most trusted solar energy installers, we make it our mission to educate and support those who believe in protecting the environment by switching to renewable power.

After 13 years of local ownership, community sponsorship and successful installations, we’re proud to keep helping consumers go solar. Are you planning on using these incentive tips? Why not share them with a friend on social media or subscribe to our blog for more insights on home solar power systems?

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