In December 2020, the United States Congress passed a spending bill that includes an extension for a solar tax credit.
The tax credit is an incentive for homeowners who want to undertake solar projects at a lower overall cost.
Experts note the solar investment tax credit (often abbreviated as ITC) as one of the most influential federal policy implementations supporting the expansion of clean energy and the solar industry.
So, how does the federal solar tax credit work? Let’s recap the history and impact of the solar investment tax credit policy.
What is the Solar Investment Tax Credit?
The solar ITC is an option that allows owners of new residential and commercial solar energy systems to deduct a percentage of the system’s total cost from their taxes.
In other words, the credit will act as a reduction in the taxes you owe. This policy has contributed to 10,000% growth in the solar industry since Congress established it, with an average annual growth of 50% over the last decade.
The incentive for going solar has helped create hundreds of thousands of jobs in the industry. In fact, the solar ITC contributed to the creation of 156,000 jobs between 2014 and 2019 alone.
The opportunity also led to thousands of new solar companies opening and increased the solar industry’s value by billions of dollars.
From the beginning, the federal solar tax credit aimed to incentivize clean energy and stimulate job growth. After the Energy Policy Act of 2005, the tax credit for investments in solar energy property was 30% of a solar system’s total cost.
The legislation was set to expire at the end of 2006, but due to its popularity, the Tax Relief and Health Care Act of 2006 extended the solar tax credit for an additional year.
Then, the Emergency Economic Stabilization Act of 2008 extended the tax credit for eight years, removed a $2,000 cap for residential solar electric installations, and permitted utilities and companies to pay the minimum tax to qualify for the credit.
In 2009, the monetary cap for solar heating and cooling systems was removed by the American Recovery and Reinvestment Act with a 30% tax credit in place through the end of 2016.
Solar Tax Credit Extension: What Now?
Following the solar tax credit extension, projected savings through 2024 are as follows:
- 2021-2022: Installations beginning or completed before 2023 on residential and commercial properties are eligible for a tax credit worth 26% of the system’s total installation cost.
- 2023: Installations that begin construction before 2024 on residential and commercial properties are eligible for a tax credit worth 22% of the solar system’s total installation cost.
- 2024: Installations beginning in 2024 on commercial properties are eligible for a tax credit of 10%. However, there will not be any federal credit for residential solar energy systems.
But even with tax incentives, the solar energy industry still has room for growth. It currently only makes up about 2.5% of energy production in the United States.
The continuation of solar tax policies that guarantee stability and investment opportunity for solar energy will aid expansion in the industry.
How Many Years Can You Claim Solar Tax Credit?
When you file your taxes for the year you installed your panels, you’ll receive your tax credit the following year.
If you don’t receive the entire tax credit in the first year you file, you can carry over the remaining credit for up to 5 years. After seeking tax advice from a professional and determining your eligibility, you’ll need to file under IRS Form 5695.
The IRS applies your solar tax credit to taxes owed. For example, if you qualify for a $5000 credit but owe $4000 in taxes, you can allocate those funds as credit. Any leftover funds will be issued as a refund.
However, if you already paid federal taxes by withholding them from your income, the credit will also be issued as a refund.
Is There an Income Limit for Solar Tax Credit?
While there is no income limit for the solar tax credit extension, you are not eligible for the credit if you do not pay federal taxes.
If you’re on a fixed income, retired, or only worked part of the year, you may not pay enough taxes to qualify for this credit.
These are the overall requirements to qualify for the credit:
- You own your home or business (renters cannot receive a tax credit, even if they install the solar panels).
- You have a qualifying Federal Tax liability.
- You own your solar panels (e.g., homeowners who lease their solar panels through a third-party company will lose eligibility to the leasing company).
- The solar energy system is new or unused.
- The solar energy system is located in the United States.
Find out the solar incentives by state to see if you qualify for a state tax credit or any unique income requirements.
When Is the Right Time for Solar?
With these incentives in mind, why wait to install solar panels?
The sooner you start construction, the more money you’ll get back from the federal government.
Remember, the extension ends in 2023 for all residential properties and 2024 for commercial properties. So, take advantage of this opportunity and go solar today!
You can begin by determining which solar energy system is right for you. Browse products from professional solar providers like Unbound Solar® to compare prices, installation costs and determine which products will qualify for the solar tax credit extension.