How to Invest in Solar and Get a Federal Tax Credit

Are you looking for a way to save money on your taxes? If so, you should consider investing in solar panels for your home! Not only will you be helping the environment, but you'll also receive a federal tax credit for doing so. In this blog post, we will discuss how to take advantage of this tax credit and what it means for you. So read on to learn more!


How does the solar tax credit work in 2022?

The federal solar tax credit, also known as the Investment Tax Credit (ITC), is a tax credit that allows you to deduct a certain amount of money from your taxes for each solar panel that you install. The ITC applies to both residential and commercial solar installations, and it can be used for both new construction and retrofits. The amount of the credit depends on the size of your solar system, and it will be reduced over time.


In 2020, the ITC is worth 30% of the cost of your solar system. This means that if you install a $20,000 solar system, you can deduct $6000 from your taxes. In 2021, the credit will drop to 26%, and in 2022 it will drop again to 22%. After that, the credit will go away for residential solar installations, though it will remain available for commercial solar installations.


So if you're thinking about going solar, now is the time to do it! Not only will you be saving money on your electric bill, but you'll also be getting a nice tax break. And if you're worried about the upfront cost of solar, don't worry - there are many financing options available that can make going solar more affordable than you think.


IRS Form 5695

If you're planning to install solar panels in 2020, you'll need to fill out IRS Form 595. This form is used to claim the federal solar tax credit, and it's pretty straightforward. Simply enter the amount of your credit (in dollars) and the date that your system was installed. You don't need to include any receipts or other documentation, but it's a good idea to keep them in case the IRS has any questions.

The solar tax credit is a great way to save money on your taxes, and it's one of the reasons why solar is such a popular investment. So if you're thinking about going solar, be sure to take advantage of this valuable tax credit!


What is a tax credit?

The federal residential solar energy credit is a tax credit that can be applied to the cost of a solar photovoltaic (PV) system and received as a refund. The system must be operational for the tax year and produce power for a home in the United States. The IRS does not have a bright-line test defining "placed in service," but it has equated it with completed installation.


Congress passed an extension of the ITC in December 2020, which offers a 26% credit for systems installed in 2020-2022 and a 22% credit for those installed in 2023.The Production Tax Credit (PTC) was first introduced in 2004 and provides a 30% income tax credit to qualifying small manufacturers. Many businesses have taken advantage of the PTC since its beginning, some more than once.

The tax credit ended on December 31, 2019 but will be revived by Congress if it is reauthorized before then. The partial production credit will be available for projects begun construction and placed in service before January 2020.


The solar investment tax credit (ITC) is a federal income tax credit that applies to both residential and commercial solar systems. The ITC was introduced with the Energy Policy Act of 2005, aimed at accelerating the deployment of solar energy technologies in the United States.


Am I eligible to claim the federal solar tax credit?

If you fulfill all of the following requirements, you may be able to claim this tax credit:

  • Between January 1, 2006, and December 31, 2023, your solar PV system was put in place.

  • If the electricity produced by your solar PV system is credited against, and does not exceed, your home's electricity usage, it is eligible for the Solar Contributions Credit. The IRS has authorized a taxpayer to take advantage of a section 25D tax credit for the purchase of part of a community solar project.

  • You are the owner of the solar PV system, which you purchased with cash or through financing but are neither leasing nor bound to buy electricity produced by a system you do not possess (i.e., you own it).

  • The solar PV system is either brand new or being used for the first time. The credit can only be claimed on the "original installation" of the solar equipment.


TO INSTALL SOLAR, I MAY RECEIVE A REBATE FROM MY ELECTRIC UTILITY

Under most circumstances, utility subsidies paid to you to install a solar PV system are excluded from your income taxes through a federal exemption. When this occurs, the solar utility rebate is deducted from your system costs before you compute your tax credit.


RENEWABLE ENERGY CERTIFICATE PREMIUM

When your utility or other buyer pays you money in exchange for renewable energy certificates or other environmental qualities of the electricity generated (whether upfront or over time), the payment is likely to be taxable income. If that's the case, your gross income will go up, but you won't be able to use the solar tax credit.


RECEIVE A REBATE FROM MY STATE GOVERNMENT

State government rebates, on the other hand, do not impact your federal tax credit. A state rebate can reduce your system's cost basis, though, which will lower the value of any depreciation deductions you claim on the system.


STATE TAX CREDIT

Solar energy systems are eligible for both state and federal tax credits. Solar panel installations generally don't influence one another, but rather the amount of money you pay in taxes. When you obtain a state tax credit, your taxable income on your federal taxes will be higher than it would have been otherwise because you'll have less state income tax to deduct.


The Tax Cuts and Jobs Act of 2017 limited the amount that can be deducted for state and local taxes to $10,000, which may influence whether a state tax credit affects federal taxable income. The end result of taking a state tax credit is that the value of the state tax credit is taxed at the federal rate.


MORE RESOURCES

Here is the federal statute and IRS guidance: 26 USC § 25D at www.gpo.gov and “Q&A on Tax Credits for Sections 25C and 25D” at www.irs.gov.


Here is their updated information on the current pulse of the ITC: Database of State Incentives for Renewables and Efficiency entry on “Residential Renewable Energy Tax Credit” at www.dsireusa.org


Read the Homeowner's Guide to Going Solar.


Download the residential and commercial ITC fact sheets.

13 views