The ability to receive solar tax credit is one of the biggest reasons so many people opt for installing solar panels on their home or office. Of course, there are many other reasons that solar energy benefits both the individual and the environment but that awesome tax credit is hard to pass up. Thus, there is no denying that this tax credit is the benefit that could mean the difference between taking the plunge into solar innovation and staying away.
However, if this is part of the reason you are leaning toward solar panels the obvious question must be addressed. Do you qualify for a solar tax credit?
What people do not always realize is that there is not just one solar tax credit. There are actually two main types of solar tax credits available throughout the United States. The first, and most well-known (since it is country-wide) is the federal tax credit. The second is the state tax credit. This can vary between states. Plus, just because you qualify for federal credit does not mean you qualify for state credit.
Fortunately, this mini-guide will go over all of this and help you figure out if you qualify for a solar tax credit in any of its forms.
2020 is an interesting year for any solar tax credit. Major changes to all available tax credits are on the horizon and the implications of waiting could mean you miss out. So, if you are thinking about getting into a solar agreement now is the time to act.
What is Solar Tax Credit?
A solar tax credit is a credit on the taxes that you owe for the year. So, if you owe $4,000 in taxes for the year and your solar tax credit is $4,146, you will be able to completely erase what you owe for the year you are filing with the tax credit.
Now, this is not a rebate which would indicate that if you didn’t have taxes to credit, you would get the money added to your refund. Unfortunately, that is not how a tax credit works. Yet, that doesn’t mean it is any less useful than a rebate.
Dates of Solar Tax Credit Decline
Solar tax credit began with the Energy Policy Act of 2005 and had an original expiration date of 2007. However, throughout that time period, a series of setbacks culminated into a bill in 2015 which offered another five years of the original solar tax credit. At that time, the government believed that solar innovation would be fully-mature.
While that idea didn’t come to fruition, the government is still shutting down the solar tax credit benefits as per the 2015 extension. The good news is that all is not yet lost. While 2019 did see the decrease of the original solar tax credit percentage, there is still an opportunity to get most of what was originally offered.
Here are the different dates that are outlined in the current plan to decrease all federal solar tax credits:
- 2019: This is the last year you can receive the full 30% solar tax credit. The only way that you could receive this credit now is if your project was started before December 31, 2019, and you have completed at least one of the following items:
- The Physical Work Test: This is passed by proving that construction was underway.
- The Five Percent Test: This is passed by proving you have incurred at least 5% of the total project costs by December 31, 2019.Additionally, you need to fill out an IRS Form 5965 to validate your qualification and add all of your renewable energy information to the 1040 form when you file your taxes. (Remember, due to COVID-19, there is a tax extension until July 15, 2020.)
- 2020: Solar tax credit is reduced from 30% to 26% of your installation costs.
- 2021: Solar tax credit is further reduced to 22% of your solar panels system installation costs.
- 2022 and Beyond: Solar tax credit is further reduced to 10% of your solar panels system installation costs. However, this solar tax credit is only available for commercial solar energy systems.
This means that starting in 2022, if this plan is followed through completely, there will be no more new residential solar tax credit available for individuals. Considering that the average solar panel system installation costs around $13,142 after tax credits this means that individual households will be paying an average of $17,732.
For the average individual, that’s a lot of money to save (or come up with). So, it is clear that if you are thinking about getting solar it is better to get it sooner rather than later.
Do You Qualify for Solar Tax Credit
Qualifying for the solar tax credit, at least until 2022 is going to relieve a major burden even though you can no longer receive the full 30%. Therefore, if you are leaning toward getting solar panels and you don’t want to lose out on another 4%, it is important to have your project in the works before December 31, 2020.
Here are the details of eligibility for the federal solar tax credit:
Did You Buy Your Solar Panel System?
The only way you can be eligible for a solar tax credit is if you were the one who actually purchased the solar panel system. Unfortunately, that means individuals who entered a solar panel leasing agreement or PPA are not eligible for a solar tax credit.
To receive a solar tax credit, you must actually buy the system. Therefore, if you do lease your solar panels or if you have some kind of PPA the person (or company) that offered this option is likely still eligible for a solar tax credit.
Do you rent or own your home?
In addition to needing to buy your solar panel system, you also need to own your home. Renters are ineligible for a solar tax credit because they cannot own a solar panel system. If you rent, your landlord can own the solar panel system, but since you cannot take your solar panel system with you when you leave, it is not possible for a renter to own a solar panel system.
Does Your Federal Tax Liability Qualify for Solar Tax Credit?
This is an interesting one because you might not be sure at the time of your filing. There is no number specifically that will qualify you or disqualify you, as you must simply owe enough taxes to qualify for the solar tax credit. For instance, if you are on a fixed income, retired, or if you only worked part of the year, you might not be eligible for a solar tax credit.
File the (Investment Tax Credit) ITC for 2020
Even though it is not something that you normally do, it is easy to file an ITC. (Just don’t forget to file it!) To file an ITC to receive your solar energy tax credit, fill out the IRS Form 5695, “Residential Energy Credits,” and include the final result of that form on IRS Form 1040 in your 2020 taxes.Although, if you have an accountant, you should just make sure they know you are eligible for the solar tax credit along with the information and they should be able to take care of most of the formal paperwork.
State Tax Credit
All state tax credits are offered on a state by state basis. Some states only offer the federal solar tax credit, while other states like New York, offer additional incentives. Specifically, New York offers a Solar Energy System Equipment Credit which is a solar tax credit that refunds solar panel system owners 25% up to $5,000 for equipment expenditures.
New York isn’t the only state to be doing this, but it definitely has one of the most generous offerings. Here are some of the other states that have exceptional solar energy incentives:
- New Hampshire
- New Jersey
- New York
- South Carolina
In summation, it is important to keep in mind that solar tax credits vary. So, it is always important to do your own research when trying to decipher exactly what you are entitled to in your area. Additionally, just like any other type of credit or financial rebate, it is up to you to be vigilant. No one is going to hold your hand through the tax process. While tax credit is a major deal when you are getting solar, when it comes down to pursuing it you are going to have to fill everything out and do the research for what you are owed in your state yourself. So, remember that when tax-time comes around.