The Federal Solar Tax Credit, Explained in Plain English

The Federal Solar Tax Credit, Explained in Plain English

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The 30% Federal Solar Tax Credit can save you thousands when you switch to solar. But how does it work?

We’re here to explain the Federal Solar Tax Credit in plain English. If you want a basic overview of solar incentives without wading through the tax jargon, you’re in the right place.

What is the Federal Tax Credit for Solar?

When you install a solar power system, the federal government rewards you with a tax credit for investing in solar energy.

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.

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.

For example, let’s say you owe $5,000 in federal taxes this year. If you claim a $3,000 tax credit, that pays off part of your liability. You would be left to pay just $2,000 in taxes after the credit is applied.

It’s 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.

How much money do I save with the Federal Tax Credit?

Right now, the tax credit is worth 30% of your total system cost. This includes the value of parts and contractor fees for the installation.

If it costs $10,000 to buy and install your system, you would be owed a $3,000 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 still get the benefits of cheap, renewable energy. But missing out on the tax credit is a huge blow to getting a positive ROI from your system.

It makes more sense to finance 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 Tax Credit Stay in Effect?

As the saying goes, “all good things must come to an end.”

Soon, the federal government will begin trimming back on its 30% tax credit incentive.

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:

  • 2018: 30%
  • 2019: 30%
  • 2020: 26%
  • 2021: 22%
  • 2022: 0% (10% for commercial projects)
The rate of the federal tax credit for solar installations through 2022.
The Federal Tax Credit is slated to be phased out by 2022.

You can claim the credit in the same year you complete the installation.

The tax credit plays a major part in the return on investment you see from going solar. It won’t be around forever, but the good news is you still have at least another year to capitalize on the full 30% credit.

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. The more you spend on your project, the larger your credit – 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. 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:

Solar Installation Costs after Federal Tax Credit has been applied

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 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. (You can find an in-depth walkthrough of this process with visual aids on EnergySage’s website.)

  • 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 5965 to add up your renewable energy credits.
  • Add your renewable energy credit information to your typical form 1040.

That’s it!

We hope this serves as a good introduction to the Federal Tax Credit and helps you navigate the research process. 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.

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