Installing a solar system on your house is a great way to take control of your finances and lock in the rate that you pay for the next 25 years plus. However, there is an initial investment required in order to buy a system. One of the amazing financial incentives that’s available when you go solar is the federal tax credit. What exactly is the federal tax credit for solar and how does it work?
The federal tax credit for solar energy lets you claim a tax credit that’s equal to 30% of the purchase price of your solar system. That’s almost like getting a 30% off coupon when you go solar. That leaves you with only 70% of the total purchase price to pay for (unless you happen to be on Empire Electric and then you can save even more money).
How exactly does this tax credit work? Is it super complicated to claim? The good news, it’s one of the simpler items on your tax return. When it’s time to file your taxes, there’s a one page form that asks you to enter the total cost of your solar system. There’s a line below that where you multiply that by 30% and then that amount is your credit.
We’re not talking about a tax deduction that lowers your overall taxable income. This is a dollar-for-dollar reduction in your federal taxes.
For example, let’s say you owe $6,000 in federal taxes this year. You get a solar tax credit of $5,000. The tax credit then wipes out $5,000 of the $6,000 that you have to pay, leaving your federal tax bill at only $1,000!
One point of clarification on how the solar tax credit works is that it is a non-refundable credit. That means that you can never claim more in a single year than what you owe. If your solar tax credit amount is for more than what you owe, then you can roll it over into subsequent tax years.
To illustrate, let’s say you owed $6,000 in taxes this year and you got a $10,000 solar tax credit. The tax credit would completely wipe out your tax debt of $6,000 for this year and you would carry over $4,000 of credit for next year. If you didn’t use it all up the following year, you could roll it over to the next one.
It’s important to understand that the tax credit is simply a reduction in the amount of money that you would normally have to pay the federal government. It’s not a subsidy or a refund. It’s simply the government allowing you to keep more of your own money instead of sending it to them.
To claim the tax credit, you’ll use IRS Form 5695 (or let your tax professional do it). You’ll fill out the form and then use the credit claimed on the form to offset the amount of taxes calculated on the other pages of your tax return.
You don’t have to turn any paperwork about your solar installation to the IRS when you file your return. It’s a good idea to hang onto your receipt to document your solar system purchase and how much you paid for it. This way, you can provide documentation in the event of an audit.
Overall, the solar tax credit is a huge incentive that’s available to anyone that buys solar for their home. Currently, it’s on the books at 30% through 2019 and then will experience a gradual step down until it expires in 2022.
Have more questions about the credit? Ready to get your 30% savings? Contact us and we’ll help get your questions answered!