Understanding the Solar Investment Tax Credit
The Solar Investment Tax Credit, or ITC, was created in 2005 and originally offered a hefty 30% tax credit benefit. In the almost two decade history of the solar tax credit, the credit ratio has been lowered by just 4%. Currently, you can get a federal tax credit of up to 26% when you install a solar energy system on your property.
The good news is that the price of installing residential solar panels has steadily declined since the launch of the tax credit, with some reports estimating a reduction in costs by up to 90% in the past decade. So, the value of the solar tax credit in 2021 is arguably an even greater value than in past years. But federal tax credits for solar won’t be around forever.
It should be pointed out that the ITC has many names, so, when doing your research, if you see mentions of the federal solar tax credit, solar tax credit, solar ITC, or the investment tax credit, these terms are all referring to the same thing.
Keep reading to find out how the solar tax credit can help you save on your 2021 taxes, what you need to qualify, and how to apply.
History of the Solar Tax Credit
The federal solar tax credit has been extremely impactful on the solar industry in the U.S. According to the Solar Energy Industries Association (SEIA), “since the ITC was enacted in 2006, the U.S. solar industry has grown by more than 10,000%.” The federal tax credit has fueled not only the growth of renewable energy, but also job creation and the U.S. economy. By taking advantage of the 2021 solar tax credit today, you can join the over half a million homes and businesses that have already taken this step towards energy independence.
Solar Tax Credit Cost Savings
The solar ITC can make installing solar a strategic investment, but it won’t make getting your solar energy system entirely free. You will still have either upfront or monthly payments, depending on if you finance your system or if you purchase or lease your solar panels.
If you’ve been thinking about joining the thousands of people that already benefit from solar energy, using the solar tax credit in 2021 is a great value. The average solar panel system cost between $15,000—$25,000, which would make the 26% tax credit worth anywhere from $3,900—$6,500.
Don’t put becoming part of the solar energy revolution on the back burner because the federal solar tax credit is set to expire in 2024. The good news is that if you start now, you still have ample time to do your solar research without feeling like you have to make an impulse buy. Make this year the one where you benefit from this exclusive IRS tax credit by getting solar for your home.
Remember, this is a federal incentive for solar energy systems, which means you can claim it no matter which state you live in. Check to see if your state offers further deductions for solar builds to compound your savings even more. Here are just a few of the states most popular for going solar:
How to claim your IRS Solar Tax Credit
Now that you know how you can benefit from the federal solar tax credit, it is important to understand how you will be receiving your rebate from the IRS.
The IRS offers this refund as a tax credit, which means you will not be receiving a check for the money you spent. You will, however, receive your savings in the form of a credit on your taxes. So, hypothetically, if you were to file your taxes and ended up owing $4,000 in federal taxes, but you qualified for $3,900 in tax credits due to the solar tax credit, then you would only have to pay the difference of $100 in federal taxes.
Some solar businesses, such as Tesla, are making it even easier to claim your IRS solar tax credit by bundling the solar roof and solar panel installation together. Check to see if your local solar provider offers bundling as an option to make it easier to keep track of your expenses and file for your ITC.
However, keep in mind that if you do not owe federal taxes, you will not receive any credits or refunds. Furthermore, you cannot apply the federal tax credit to any state taxes that you may owe. If you owe federal taxes, but in a lesser amount than your credit, you will only receive a credit up to the amount you owe. Fortunately, the remainder of any credit unused will roll over to the following tax year (and for up to 20 years after that!). And, if you previously met the criteria for claiming a tax credit, but forgot to claim it in past years, you can file an amended tax return to get your solar tax credit.
If your living and working situation has not changed, you may be able to look at your previous years’ federal taxes to see if your household typically owes federal taxes to make sure that this incentive makes sense for you.
Qualifying for the Solar Tax Credit
Many types of homes and apartments qualify for the solar tax credit, such as single-family homes, mobile and manufactured homes, apartments and condominiums. Other less-traditional structures, such as houseboats, and cooperative apartments can qualify for the IRS solar tax credit as well.
You can even claim the solar ITC for any rental properties you may own, as long as you live there for a portion of the year. In this case, the percentage you can claim will depend on the amount of time you reside in your rental property per year. For example, if you live at your rental property for half of the year, and rent it out the other half of the year, you will be allowed to claim 50% of the IRS tax credit.
However, solar consumers who lease their system or enter into a solar power purchase agreement (PPA), are not eligible for the ITC. The federal tax credit for solar is only available to you if you purchase your solar energy system. If you do not own your solar setup, then the company that does own it is the one that is able to claim the solar ITC.
Although solar panels are top of mind for most people when it comes to solar energy, the solar ITC covers multiple types of energy-saving hardware, as well as some labor costs. So, supplementary solar equipment, such as tangential solar roof products, and solar power storage, such as batteries, can also help you reach the maximum 26% federal solar deduction.
Applying for the Solar Tax Credit
Applying for the Solar Tax Credit isn’t too difficult. You will have to fill out and return IRS form 5695. The IRS also provides a printable worksheet with instructions to calculate your expenses and limitations to aid in filling out form 5695. Here’s everything you need:
If you’re out of practice or new to filling out tax forms, worry not. Just remember to keep all receipts. There are also YouTube videos that offer instructions on filling out form 5695. And online tax software, such as Turbotax, will have this form available as well.
There is no extra cost to apply for the solar tax credit (other than the ordinary costs you might incur from getting your taxes done and mailing in forms). Once you’ve sent in your taxes, you should hear back about the result of your IRS solar tax credit in the standard time it takes to receive your federal tax return.
Let’s zoom out for a moment and look at the big picture to get a better idea of how the solar tax credit can help you. Even after receiving your federal tax credit for your new solar panel system, savings will continue to roll in long term. Residual savings should add up pretty quickly thanks to the low electricity rates solar owners enjoy. By going green and using the renewable energy of the sun, green electricity rates will keep your monthly electricity bill lower for years to come.