So how does it work? What is the difference between a tax refund and a tax credit? How does it alleviate installation costs for solar systems? Exactly when and how will you receive your money?
You’ve probably read many articles that attempt to explain the credit. You may have even spoken with a few solar reps. Don’t worry though, we’ve got you covered.
We’ll break it down in plain English and, by the time you’ve finished, you”ll know exactly what to expect when you go solar.
What is the Federal Tax Credit for Solar?
Put simply, it is a reward the federal government gives you for choosing solar power.
Formally known as the Investment Tax Credit (ITC), the incentive was initially a byproduct of the Energy Policy Act of 2005. It is an effort to encourage the United States to transition into a country that relied on renewable energy sources. The credit was supposed to expire in 2007 but its mass popularity caused Congress to continuously extended its expiration date. Now, the credit is set to expire December 31, 2021.
As it stands, the federal solar tax credit for your solar installation fees is applied to your income taxes at a 1:1 ratio.
That means a $1 solar credit = $1 less you pay in taxes.
How do you qualify for the Federal Solar Tax Credit?
To qualify for the solar tax credit you must:
Owe taxes to to federal government
Own your system, not lease it.
Install a solar system before 2022.
Solar tax Credit vs. Tax Refund
Why do you have to owe taxes to claim the credit? It’s because of the difference between a tax credit and a tax refund. Many people use these terms interchangeably but, in the land of taxes, they do not mean the same thing.
For a refund the government recognizes you’ve been overcharged and gives you cashback. With a tax credit a percentage of the taxes you owe is forgiven.
For example, say you paid $5,000 in federal taxes this year. You installed your solar system for $10,000. Your credit (30% of $10,000) is $3,000. That means you only paid the government $2,000 in taxes for the year.
How will a solar tax credit impact my tax refund?
It’s important to note that your tax credit is subtracted from your taxesafter your refund is calculated.
Suppose you paid $5,000 in federal taxes. It’s found that you are due a $1,000 tax refund. That means you still paid $4,000 in federal taxes. The federal government now subtracts the $3,000 solar credit you earned. Now you only had to pay $1,000.
Looking at it like this, it appears like your refund check has gotten bigger! In reality, your refund check is being inflated by your solar credit.
What if your solar tax credit is larger than the amount you owe?
If your credit is larger than the amount you owe, the excess is carried over to next year’s tax season.
We’ll use the same example where you’ve earned a $3,000 solar tax credit from your $10,000 installation.
If you paid $5,000 and your tax refund is $3,000, you now only paid $2,000 in taxes. You solar tax credit cancels out that $2,000 and adds it to your refund check.
The remaining $1,000 solar tax credit will be deducted from next year’s taxes or whatever year you owe again.
To own or to lease solar? That is the question.
If you want to get the federal solar tax credit, then you should buy your own solar system.
You should claim credits in the same year as your solar installation.
As far as how to claim it, that’s something you shouldn’t have to worry about. A good solar installer, like SunSource Homes, will manage all that for you. However, it won’t hurt you to track your expenses, too!
Always save those receipts!
Keep in mind when you start shopping for solar installers that installations will take, on average, 2-3 months to be installed and fully operational. That’s after you go through your consultation, have your home inspected, and have your property go through any necessary reinforcements to prepare for solar panels. Remember that there will also be others getting their system installed.
The government used to make owners wait until their systems were operational to claim the credit. However, the most recent legislation allows property owners to claim it as soon as installation begins. If you are aiming to receive the full 30% credit, you still need to make sure your system will be turned on by December 31, 2019.
To be safe, we recommend you start shopping for solar and getting quotes no later than July 2019.