How does the federal solar tax credit work: And how much longer will it be around?

How does the federal solar tax credit work: And how much longer will it be around?

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Solar’s 30% Federal Tax Credit Is Ending Soon.  How can you max out savings before it’s gone for good?

One of the most significant U.S. federal incentives in current history, the 30% Federal Solar Tax Credit, is soon coming to an end. Since 2006, the Federal government has helped make solar an affordable option for many homeowners. The solar tax credit saves customers upwards of $3,000—$10,000+ on residential solar installations. However, as the saying goes, “all good things must come to an end,” and by the year 2020, the federal government will begin trimming back on its 30% tax credit incentive. By the year 2022, the feds will stop incentivizing residential homeowners altogether.  The good news is there’s still time to capitalize on the full 30% tax credit that is available today.  In this short article, we’ll equip you with the necessary info needed to help maximize your return on investment when going solar this tax season.

What is Tax Credit?

A tax credit is a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero according to Turbo Tax.

Simply put: Federal Tax credit = Less Taxes.

What is Total Solar Cost?

Keeping track of your expenses is a critical step to maximizing your savings: the more you spend on your solar installation as a whole, the more your tax credit value increases. Here are some of the expenses associated with going solar that you can add to your total solar cost:

  • Solar Components
  • Freight Shipping Costs
  • Solar Consulting fees
  • Professional installer
  • Electrician Fees
  • Engineer Fees
  • Tools bought or rented
  • Wiring
  • Screws, Bolts, Nails, etc
  • Equipment purchased or rented (scaffolding or a man-lift, for example)
  • Permitting fees
  • Permitting service costs

Your solar cost will vary depending on your specific approach and resources needed when installing your system. For instance, if you decide to DIY your solar, you can add your new tool/equipment expenses to your total solar cost and increase your tax credit value. Just make sure to keep your receipts for proof.

Making The Federal Tax Credit and Solar Cost Work For You.

Let’s say your solar expenses total at $10,000. 

Multiply 10,000 by 30%


10,000 x .30 = $3,000

That’s $3,000 LESS you owe on federal income tax!

Furthermore, let’s say your neighbor bought the same system but he needed additional tools and equipment, putting the total solar cost at $12,000. That would mean he would owe $4,000 LESS on income taxes!

The more you spend, the more you save.

How Much Time is Left To Max Out Your Savings?

December 31st, 2019 is your last day to get the full 30% residential renewable energy tax credit. After that, the tax credit percentage will drop every year accordingly:

  • 2016 – 2019: The tax credit remains at 30% of the total cost of the system.
  • 2020: Owners of new residential and commercial solar can deduct 26% of the cost of the system from their taxes.
  • 2021: Owners of new residential and commercial solar can deduct 22% of the cost of the system from their taxes.
  • 2022 onwards: Owners of new commercial solar energy systems can deduct 10% of the cost of the system from their taxes. There is no federal credit for residential solar energy systems.

Why You Should Buy and Not lease.

There is one caveat when deciding to go solar — you’ll need to buy solar and not lease it before 2020. If you do choose to lease, just remember, it’s the lessor who receives the 30% tax credit, not you, since they technically own the solar system you pay to use. Also, take into account that leasing has a 15-20 year pay off period when compared to a DIY system that only has a 5-10 year pay off period, and that’s for the same solar system.  The sooner you pay it off, the more money you save.

How to apply for your 30% Federal Tax Credit

Once you’ve spent the money on solar, you’ll need to prove it to the government to claim your tax credit.  This requires you to file a specific form during tax season.  It might be easiest to reach out to your tax professional to help guide you.   For those that do their own taxes, you can use the steps below to file your Residential Renewable Energy Tax Credit.

  1. Gather all your expense receipts and put them in a safe place.
  2. Determine if you are eligible for the Federal ITC (Investment Tax Credit) – make sure you credit for ownership and that federal tax liability are in order. You are eligible for the Federal ITC as long as you own your solar energy system, rather than lease it. You are also eligible even if the solar energy system is not on your primary residence – as long as you own the property and live in it for part of the year, you can claim the solar tax credit.
  3. Complete IRS Form 5965 to validate your qualification for renewable energy credits. Simply fill in the segment regarding energy credits, and you’re good to go! For a more in-depth look at this process, read here.
  4. Add your renewable energy credit information to your typical form 1040.

There you have it, all the info you need to go solar and claim the 30% federal tax credit. It’s easier than it sounds, and the financial benefit is too good to pass up! So don’t let your solar project stagnate, get going soon before the tax credit is no more!

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