Solar Tax Credit Extended 2 More Years
If you’ve been considering investing in a solar system for your home, you’ve likely heard about the Federal Solar Tax Credit (Investment Tax Credit or “ITC”) and its originally planned phase out for homeowners at the end of 2021. What you may not have heard is that in Dec. 2020, the federal spending legislation added two more years to the solar tax credit. So the phase out is extended until the end of 2023. The amount of the credit also changes to allow for a 26% credit in 2021 and 2022 with a reduction to 22% in 2023.”¹
How Does the Tax Credit Work?
Those eligible for the ITC file for it along with their federal tax paperwork for the year the solar system is installed and permission to operate (PTO) has been provided. The tax credit offsets your federal tax liability. As an example, if you install a solar system at a cost of $10,000 in 2021 when the tax credit is 26%, when you file your taxes in early 2022, you would deduct $2,600 from your total federal income tax liability, saving you $2,600 and effectively reducing the net cost of you solar system to $7,400. For more details on how to file, see the IRS Instructions for Residential Energy Credits Form 5695 and the most recent available Residential Energy Credits Form 5695 here. (Please note that as of this writing, the new ITC legislation had just been passed by Congress so these forms had not been updated.)
The solar tax credit can be used by homeowners who purchase their solar system outright or finance their system through a loan or home equity line of credit. The key is that the homeowner needs to be the owner of the solar equipment to benefit from the tax credit. Those using solar leases or power purchase agreements (PPAs) are not eligible since the business providing the solar is the owner and will therefore take the tax credit.
Since the ITC is a “tax credit” and not a “rebate”, people who don’t owe federal taxes, many retirees for example, are not able to make use of the tax credit benefit. One possibility is to generate taxable income in the year you go solar (perhaps by selling some appreciated assets or converting a Traditional IRA to a Roth IRA) which might enable you to make use of the tax credit. Keep in mind that if you don’t have enough tax liability to use all of the tax credit in one year, you can roll it over to future years for as long as the tax credit is in effect. Please note that there is no additional state tax credit in place for solar systems in California.
As with all tax matters, please consult your tax advisor.
Is the Solar Tax Credit Effective?
The solar ITC was originally enacted in 2006 to encourage investment in solar energy systems. According to the Solar Energy Industries Association (SEIA), the residential and commercial solar ITC has helped the U.S. solar industry grow by an average of 49% annually. “Thanks to strong federal policies like the solar Investment Tax Credit, rapidly declining costs, and increasing demand across the private and public sector for clean electricity, there are now more than 89 gigawatts (GW) of solar capacity installed nationwide, enough to power 16 million homes.”² Solar now represents 43% of new electricity generation capacity and when combined with wind, renewables are now the vast majority of new electricity generation capacity coming online today.
1. “COVID Aid Package Makes Initial Commitment to a Clean Energy Recovery”, SEIA, Dec. 21, 2020.
2. “Solar Industry Research Data, Solar Industry Growing at a Record Pace”, SEIA, Dec. 15, 2020.
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