HOW DOES THE FEDERAL SOLAR TAX CREDIT WORK?
Solar adoption is skyrocketing, thanks to plummeting solar panel prices that enable homeowners to save money. For the first time, homeowners can control their electricity costs by going solar instead of being at the mercy of ever-rising utility rates. And through the end of 2019, going solar is extra appealing thanks to the federal Residential Renewable Energy Tax Credit, which can be worth up to 30% of the total cost of your solar installation! Under current law, the 30% tax incentive will remain in effect through December 31, 2019. After than it will drop down to 26% for 2020, 22% for 2021, and 10% thereafter.
(Learn just how much these savings could mean to you with a free quote from Sweetwater!)
A tax credit is a reduction in the amount of taxes you owe. The typical homeowner that goes solar with Sweetwater pays about $22,000 for a 7 kilowatt solar installation. So, in this example, the 30% federal tax credit could reduce your taxes by $6,600 – quite a nice bonus! Taking advantage of this credit is easy as A-B-C, if you know the eligibility requirements and how to claim it.
KEEP IN MIND:
We’re solar people, not tax people, so we don’t give tax advice. Anything you read on this page is merely an example and may not be appropriate for your unique financial situation. Not everyone will be eligible, so please consult a tax professional before filing your tax credit.
TAX CREDIT ELIGIBILITY
To qualify for the 30% federal Residential Renewable Energy Tax Credit, you must meet all of the following requirements:
- Your system must be installed by December 31, 2019.
- You must own your home (renters are excluded, unfortunately).
- You must pay enough taxes to the Federal Government to qualify for the 30% tax credit.
- You must own your solar panels.
This last point isn’t quite as obvious as it might seem, since many homeowners today actually lease their solar systems through third party companies. While leasing may make sense in some situations, it means that the leasing company gets to claim the tax credit instead of you! By contrast, homeowners that buy their panels outright or finance them with a loan do get to claim the tax credit.
TAX CREDIT VS. REBATE
It’s important to understand that this is a tax credit and not a rebate. Tax credits offset the balance of tax due to the government (therefore, if you owe no tax, there is nothing to offset and you can't take advantage of it). Tax rebates are payable to the taxpayer even if they owe no tax. While most people qualify for the solar tax credit, there are some who do not. Anyone who does not owe federal income taxes will not be able to benefit from the tax credit. And, if you’re on a fixed income, retired, or only worked part of the year, you may not owe enough taxes to take full advantage of this credit.
If you do owe sufficient federal taxes the year that you finance or purchase your system, then the credit can be applied to pay off the taxes owed. If you already paid that taxes by withholding it from your paycheck, the federal government will apply the tax credit to a tax refund. This refund can be used to pay down the balance on a solar loan. It’s important to note that the tax credit be carried, which means that you can use any remainder from this year as a credit towards next year’s taxes.
Homeowner #1 buys a $30,000 solar system, meaning they are eligible for a $9,000 tax credit (30% of system costs). Through their employment they owe the government $9,000 in taxes, but this is withheld on their W-9 so they end up owing nothing when they file. In this example, when the solar tax credit is applied to the $0 balance they owe the government, they receive a tax REFUND of $9,000 that they can then apply to their solar loan - or keep if they choose.
Homeowner #2 also buys a $30,000 solar system but they only owe the federal government $4,500 in taxes because they were on a fixed income. This customer did not withhold any money from their paychecks and owes the full $4,500 when they file. When the $9,000 tax credit is applied, they can only claim $4,500 of it because they only owed that much in taxes. In this example, the customer does not have to pay any taxes that year but they also will not receive a refund check from the IRS.
The upside is that any remaining tax credit can be carried forward and applied to next year’s taxes. In this scenario, if Homeowner #2 owes the government at least $4,500 in taxes for the following year, they can utilize the rest of the credit.