Federal Solar Tax Credit: A Brief Overview
When you install a solar system, 26% of your total project costs (including equipment, permitting and installation) can be claimed as a credit on your federal tax return. If you spend $10,000 on your system, you owe $2,600 less in taxes the following year. The solar tax credit expires in 2022.
What is the Federal Solar Tax Credit?
First, let’s take a short walk down memory lane. The Solar Investment Tax Credit (commonly called the ITC) was first offered via the Energy Policy Act of 2005. Thanks to its popularity and its contribution toward renewable energy goals, the ITC has been extended multiple times. While it was originally set to expire in 2007, the current federal solar tax credit extension is set to expire in 2022. Homeowners can use the federal tax credit for battery storage, installing new systems, and more.
Alright, now on to what the tax credit does. If you want a basic overview of solar incentives without wading through the tax jargon, you’re in the right place.
The bottom line is this: When you install a solar power system, the federal government rewards you with a tax credit for investing in solar energy. In fact, 26% of your total project costs (including equipment, permitting and installation) can be claimed as a credit on your federal tax return.
A quick but necessary disclaimer: we’re solar experts, not tax accountants! We do our best to give accurate advice, but please check with a professional to be sure you’re eligible to claim the credit.
A tax credit is a dollar-for-dollar reduction of the income tax you owe. $1 credit = $1 less you pay in taxes. It’s that simple. If you spend $10,000 on your system, you owe $2,600 less in taxes the following year.
It’s important to note that a credit is different than a refund, because you have to owe taxes to claim the incentive. But since most people owe taxes, most people end up being eligible for the Federal Solar Tax Credit.
How Does the Federal Solar Tax Credit Work and How Much Will I Save?
Right now, the Solar Investment Tax Credit (ITC) is worth 26% of your total system cost. This includes the value of parts and contractor fees for the installation.
As mentioned before, if it costs $10,000 to buy and install your system, you would be owed a $2,600 credit.
You are only allowed to claim the credit if you own your system. This is why we’re strongly opposed to solar leasing if you can avoid it. If another company leases you the system, they still own the equipment, so they get to claim the incentives.
You’ll still get the benefits of cheap, renewable energy if you lease. But missing out on the tax credit is a huge blow to getting a positive ROI from your system.
It makes more sense to take advantage of solar financing instead. You’re still on the hook for a loan, but you retain rights to the incentives that help make solar such a sound investment.
How Long Will the Federal Solar Tax Credit Stay in Effect?
As the saying goes, “all good things must come to an end.” And the solar tax credit is no exception.
Soon, the federal government will begin trimming back on its 26% tax credit incentive. In fact, the federal solar tax credit of 2020 is the final year you can claim the full 26%.
The credit steps down in value over the next few years, until it disappears completely for residential customers in 2022. Here’s the value of the federal tax credit over the next five years:
- 2020: 26%
- 2021: 22%
- 2022: 0% (10% for commercial projects)
You can claim the credit in the same year you complete the installation, so it’s not too late to take advantage of the 2020 credit.
The tax credit plays a major part in the return on investment you see from going solar. Grid-tie systems pay for themselves either way, but claiming the credit allows you to realize more immediate savings. We can’t recommend enough that you capitalize on the full 26% credit, because the value only shrinks after 2020.
How do I claim the Federal Tax Credit?
So let’s get to the good stuff. What do you need to do to actually get your hands on this money?
Our first bit of advice is to keep all your receipts from the start of your solar installation project. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. The more you spend on your project, the larger your credit – so make sure to keep track of everything!
Here are some of the expenses that you are allowed to claim:
- Solar equipment
- Freight shipping costs
- Solar consulting fees
- Professional installer fees
- 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
Costs will vary depending on the approach you take to installation. The good news is that hiring a contractor is an expense that can be claimed.
You can also choose to install the system yourself. Although you can’t claim your own labor as an expense for the credit, you still come out far ahead on overall project costs.
The graph below shows a comparison of the total installed costs (post-Federal Tax Credit) of the same exact system when you choose to DIY, hire locally, or source the work to a national installer:
How to File Form 5695 With Your 1040 Individual Tax Return
Once you’ve spent the money, you’ll need to prove it to the government to claim your solar tax credit. For that, you need IRS Form 5695 to claim the residential energy credit.
If you file your own taxes, use the steps below to claim your Residential Renewable Energy Tax Credit.
- Gather all your expense receipts and put them in a safe place.
- Confirm you are eligible for the tax credit. (If you own the system and owe taxes, you’re probably eligible. Check with a tax specialist if you’re not sure.)
- Complete IRS Form 5695 to add up your renewable energy credits (click the link for a step-by-step walkthrough on filing your tax forms).
- Add your renewable energy credit information to your typical form 1040.
We hope this serves as a good introduction to the Federal Solar Tax Credit and helps you navigate the research process. For residents of our home state of CA, we recommend you check out the California solar tax credit page. Everyone else can refer to our database of solar incentives by state for information on how to take advantage of even more solar tax credits.
If you need help from a solar designer, get in touch with us for a consultation. We’re happy to walk you through any questions you may have.