When Congress introduced the solar tax credit in 2005, it was designed to help jumpstart the US’ then-fledgling solar industry by lowering the cost of solar for homeowners and businesses.
The tax credit has been extremely successful since then. Congress has extended it three times (in 2006, 2008, and 2016) and, as of 2019, the solar industry has installed a total of 69 GW of solar – enough to power about 9.8 million homes.
As installation costs continue to fall, thanks to cheaper technology and streamlined installation processes, the federal tax credit, solar incentives like tax credits and utility rebates are falling away. Unless Congress passes a last minute extension, the federal tax credit will begin phasing out at the end of 2019.
But it’s not too late. Until the end of 2021, you can still take advantage of this era-defining solar incentive. Here’s everything you need to know about the federal solar tax credit.
How does the solar tax credit work?
The solar tax credit, officially known as the Investment Tax Credit or ITC, is a credit on your federal income tax for installing a solar installation on your home. As a tax credit – as opposed to a tax deduction – it offers a dollar-for-dollar decrease on your annual income tax.
Both homeowners and businesses are eligible for the credit, which as of 2019 is still equal to 30% of the total cost of your solar installation, with no maximum amount. So if you installed an average solar installation that costs about $21,000, you’d be eligible for a $6,300 tax credit, decreasing your total solar investment to just $14,700.
The tax credit is designed to help homeowners clear that cost hurdle of purchasing an expensive solar installation, and it does an excellent job. The tax credit can shorten your payback period by four years or more, depending on your energy use and costs.
An important note: The solar tax credit is a non-refundable credit. As such, if this tax credit drops your tax liability below $0 in a single year, the IRS will not give you a refund. However, if you don’t owe enough on taxes to reap the entire credit in a single year, you can break the total value up and claim portions over several years.
If you’re on a limited income, check with your tax preparer to make sure you can take full advantage of this awesome incentive. Solar installers like to include the tax credit in their cost estimates, but don’t just assume you’ll be eligible for the entire credit if you’re on a small income.
Solar tax credit helps your ROI
Since you’ll apply for the tax credit during the tax season directly following your installation, it doesn’t actually drop your initial purchase price. However, it’s still a major discount on your total installation costs and shortens your payback period as well.
To understand just how powerful the solar tax credit really is, let’s look at the lifetime solar savings of an average Nevada solar installation, both with and without the solar tax credit:
Let’s say you install a 7,000 watt solar installation with an out-of-pocket cost of $21,000. In sunny Nevada, a 7,000 watt solar installation is estimated to produce 275,000 kWh over its 25-year lifespan.
The average Nevada utility charges $0.12 per kWh and raises these prices 1.7% each year. So if you purchased 275,000 kWh of electricity (the same amount of electricity your solar installation produces) over the next 25 years, you’d spend $40,385.
So with solar panels on your roof, you’d save $19,384 and would need 14 years to pay off your investment. That’s a good return, but fourteen years is quite a long time. Let’s add the solar tax credit and see what happens.
Adding in the 30% federal tax credit, your total installation cost goes from $21,000 to $14,700. Your total lifetime savings jump to $25,684 and your return shortens to less than 10 years.
Just by taking advantage of the federal tax credit, you’ve cut four years off your return and added $6k to your lifetime solar savings.
Roof replacement and batteries are also eligible for the solar tax credit
The solar tax credit can also potentially cover roofing replacements and even energy storage systems (like the Tesla Powerwall), as long as these expenses are directly tied to the solar installation.
Let’s start with roofing. Exactly which roofing expenses qualify for the federal solar tax credit is up for debate. Tax form 5695 states that: “No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed.”
There’s a lot of vagueness in that statement and exactly how much of your roofing costs you can claim depends on who you ask. Installers agree that if you need structural upgrades so your roof can safely hold the solar panels, 100% of these costs are eligible for the solar tax credit.
If your shingles are worn or damaged, Some solar installers also recommend claiming the tax credit for the entire cost of installing new shingles. Other installers recommend only claiming the tax credit on the roof section directly below the solar panels. Still others recommend not claiming any reroofing at all.
In the end, you’re probably safe claiming the portion of the reroofing expenses for the area directly under your solar panels. However, remember that solar installers (and Earthtechling) are not tax specialists. Talk to a tax specialist before claiming any of your solar-related expenses.
Moving on to battery systems, the IRS doesn’t explicitly state that energy storage systems are eligible for the solar tax credit. As such, a stand-alone battery system is not eligible for the tax credit.
However, if you install a battery system – like Tesla’s Powerwall or the LG Chem RESU battery that Sunrun installs – along with solar panels, the entire cost of the battery system is eligible for the tax credit. So, as long as the battery system is tied to a solar installation, you’re able to claim the entire cost of the energy storage system.
Solar tax credit begins phase-out in 2020
The solar tax credit will begin phasing out in 2020. Here’s how the credit changes over the next few years, as well as how that change affects installation costs for an average solar installation.
Federal Solar Tax Credit Amount Availability Credit Value for $21,000 Installation Final Installation Cost 30% Credit 2019 $6,300 $14,700 26% Credit 2020 $5,460 $15,540 22% Credit 2021 $4,620 $16,380 No Credit 2022 and beyond $0 $21,000
The solar tax credit was designed to help homeowners and businesses avoid the high cost of purchasing a solar installation. The idea – utilized by many states for their own solar incentives – is to help the solar industry grow and mature, which leads to falling costs. As these costs fall and more homeowners can pay full price for installations, incentives in turn fall away.
State-level tax credits are also available
Beyond the federal income tax credit, many states offer their own tax credits for solar installations.
As of 2019, 7 states offer personal tax credits for residential solar, including:
- Arizona: 25% of installation cost, max of $1,000
- Hawaii: 35% of installation cost, max of $5,000
- Iowa: 15% of installation cost, max of $5,000
- Massachusetts: 15% of installation cost, max of $1,000
- Montana: 100% of installation cost, max of $1,000
- New York: 25% of installation cost, max of $5,000
- Utah: 25%, max of $1,200 before 2020 (phases out to max of $800 before 2021, then max of $400 before 2021)
If you’re eligible for multiple solar tax credits and are worried that taking one might affect the value of the other, don’t worry.
Both the federal and state solar tax credits are based on the installation cost – in other words, the amount of money you paid at the time of your installation. If you received any direct rebates from your city or utility that immediately lowered the cost of your installation at the time of purchase, those rebates affect your tax credits, lowering the amount of your credit.
Tax credits on the other hand, typically do not affect the amount you’ll receive on any other tax credit, since you’re benefiting from these credits months after you installed your panels. However, the regulations in your specific state could vary, so check with your installer beforehand.
Who is eligible for the tax credit?
In a nutshell: All homeowners that purchase and install a solar installation on their property are eligible for the solar tax credit.
However, there are a few important points to remember about claiming the tax credit for yourself:
- You can install on mobile homes, houseboats, or even in your yard. You don’t have to live in a single-family home to take advantage of this awesome tax benefit. Even if you live in a condo, mobile home, or even a houseboat, you’re still eligible for the solar tax credit. And if you can’t install panels on your roof, you can also install a ground-mounted system in your yard.
- The home does NOT have to be your primary residence. You can’t use the tax credit for a rental property, but if you have a second home that you rent part of the year, you can claim the credit for the portion of the time in which you occupy the home. So if you install your solar panels on a summer cabin or second home, the system is still eligible for the solar tax credit.
- The tax credit goes to the owner of the solar installation. If you bought your solar installation via cash or a loan, you are directly eligible for the tax credit. If you financed your installation via a lease or power purchase agreement (commonly called a PPA), then your solar company is eligible for the credit, since they own the installation.
- You can claim the credit multiple times. Let’s say you already installed solar and already took advantage of the solar tax credit, but now you want to expand your installation and add additional solar panels. The cost to purchase and install those additional panels is eligible for the solar tax credit. Of course, you can’t claim another tax credit for the pre-existing portion of the installation.
How do you claim the tax credit?
While your installer will help you fill out and send in your interconnection and net metering applications to your utility, it’s up to you to apply for the solar tax credit.
This tax credit, despite what some installers choose to describe it as, is not an instant rebate and doesn’t immediately lower your installation price. Just like any other tax credit, you’ll apply for it during the tax season directly after you install your system.
To take the tax credit, you’ll fill out Form 5695. If you are planning to break your credit out over multiple years, you’ll actually use this same form.
Remember, as a non-refundable credit, you’ll never actually hold the money from your tax credit – it can only lower your owed taxes. Still, it’s a major discount on your total solar investment and you should consider installing solar before the 26% credit runs out at the end of 2020.
Image Source: Public Domain via Pixabay