Updated July 15, 2021
Solar energy systems save money through a lower utility bill. But the costs of installing these systems are expensive. What is less known is that there is a 26% Solar Tax Credit, the Investment Tax Credit, that dramatically offsets the costs of installation.
I am a lawyer who looked at guidance from the Internal Revenue Service, the U.S. Department of Energy, and the U.S. Government’s Energystar program to tell you the 7 things you need to know about Solar Tax Credits.
The Solar Tax Credit is a very powerful tool to encourage you and other buyers to make the switch to renewable energy. It can make a real difference offsetting the costs of installing your system so that you can start saving money.
In this article, I’ll tell you what exactly a Solar Tax Credit is, how much the Solar Tax Credit will save you, when it’s effective, what’s covered by the Solar Tax Credit, and what properties are eligible.
This article uses information available as of July 2021. This list is not legal advice. Laws and regulations are subject to change and you should consult a tax or legal professional to determine whether your specific situation qualifies you for special tax treatment.
As with any tax law, the Solar Tax Credit has a lot of rules. I’ll walk you through the things you need to know below.
1. Solar Tax credit vs. Tax Rebate vs. Tax Deduction
The first think you need to know is the difference between a tax credit, a tax deduction, and a tax rebate.
A tax reduction reduces your total taxable income.
A tax credit reduces the amount of taxes you owe up to the amount of the credit.
A tax rebate pays you whether you owe any taxes or not.
For example, with tax deductions, if you make $100,000, owe $20,000 in taxes and tax you at a rate of 20%, and then receive a $5,000 tax deduction, then your income would reduce to $95,000 for tax purposes. So, you would owe $19,000.
Tax credits are similar to tax rebates but not exactly the same. Tax credits offset the amount of taxes you owe. If you owe $20k in taxes and get a $6,000 credit then you now only owe $14,000. Usually, people pay estimated taxes throughout the year in withholding payments to the IRS. In that case, if you paid $20,000 through withholding, the extra $6,000 you’ve prepaid is then sent back to you when you file your taxes. However, if you owe nothing, then there is nothing for the credit to offset and you won’t get a benefit from the credit.
Tax rebates are paid to you whether or not you have a tax payable. If you owe no taxes and you receive a $6,000 tax rebate, then you’ll receive the $6,000 rebate.
The federal Investment Tax Credit is a tax credit. However, as we talk about below, the tax credit can be taken over the course of several years.
2. You Need to Act Soon to Get the Solar Tax Credit
Under the Consolidated Appropriations Act of 2021, the Investment Tax Credit for solar energy investments is not here to stay. So if you are considering installing a solar energy system then you need to move quickly. The tax credit will disappear in 2024.
At 30%, the tax credit is greatest for systems placed into service before 2020.
The credit reduced to 26% for systems installed between 2020 and 2022.
It will further reduce to 24% in 2023 and goes away completely in 2024.
There is no guarantee that Congress will extend it. There is also no guarantee that, if it is extended, it will remain at the same level or that it will cover as much as it does.
3. What is the Credit Applicable to?
The Investment Tax Credit covers solar energy systems used in a United States residence. Your solar photovoltaic system must provide electricity for the residence and meet applicable fire and electrical code requirements.
The system must also adhere to the following requirements:
– The system must be installed or ‘placed in service’ between January 1, 2006, and December 31, 2023.
– The system must be located at a residence in the U.S. (but not necessarily your primary residence).
– You must purchase and own the system, you cannot rent or lease it.
– The system must be new and cannot have been used before, it must be an original installation.
4. How much is the credit?
Currently, the Investment Tax Credit is 26% for systems installed between 2020 and 2022. It will further reduce to 24% in 2023 and goes away completely in 2024.
What does that mean for you? If you spend $20,000 to install a solar system on your main residence then you qualify for a $5,200 tax credit. That’s huge savings for the system and that is on top of the savings you’ll see on your utility bills.
The solar tax credit can also be carried back or forward tax years if you need. It can be carried back one tax year or forward a whopping 20 years. So if you had no tax liability this year but had one last year, you can apply it to last year’s taxes. You can also use it in the future.
However, there are several caveats. According to TurboTax, if you only live at a residence part time then you can only claim the tax credit for the proportion of the year you spent at the residence. For example, if you live at a residence for three months a year, you can only claim 25% of the credit. If the system cost $20,000, the 26% credit would be $5,200, and you could claim 25% of that, or $1,300. [1]
5. What part of the project and costs qualify for the credit?
The tax credit is broad and generous, and it is very simple. The credit is allowed for essentially the entire bill for the system, cost, installation, onsite preparation, piping, electrical work to install. The only thing it does not cover is taxes you’ve paid for the system.
6. What kind of properties are eligible?
The property must be a residence. However, it does not need to be your main residence. Anywhere you reside is eligible for the tax credit.
If you do not live in the property full time, then you are only eligible for a tax credit in the proportional amount of time you live in the property. If you live at a residence for three months a year, you can only claim 25% of the credit. If the system cost $20,000, the 26% credit would be $5,200, and you could claim 25% of that, or $1,300.
The residence also does not need to be a house. The tax credit is available to systems in all residences, like houseboats, mobile homes, cooperative apartments, condominiums, and manufactured homes.
7. Solar Water Heater Credits
There are tax credits available for the installation of Solar Water Heaters. The tax credits are the same as solar photovoltaic systems discussed above, so right now it is for 26% of the cost of installation for the system. The water heater must be used for dwellings, not separate hot tubs or pools.
What’s Next
This article is just about the Solar/Investment Tax Credit. There are other financial incentives for solar energy and renewable energy. You can browse them here: https://programs.dsireusa.org/system/program