Home Finance How Does the Federal Solar Tax Credit Work?

How Does the Federal Solar Tax Credit Work?

by shamiha

Did you know that the federal solar tax credit has roots tracing back to the Energy Policy Act of 2005? From then on, the cost of switching to solar has continued to drop.

Fortunately, the federal tax credit for home solar projects is still up for grabs. It has a deadline, though, which is why now is the best time to consider tapping this green energy source.

We’ll discuss all the key details you need to know about this federal solar incentive, so be sure to keep reading.

What Is the Federal Solar Tax Credit?

The federal solar tax credit is also known as the solar investment tax credit (ITC). It incentivizes property owners and taxpayers who make solar energy technology investments.

Until 2019, the ITC granted a 30% tax credit for qualified solar energy technologies. It then dropped to 26% in 2020 and was also set to expire that year.

However, in December 2020, Congress extended the program until 2022. As such, the federal solar tax credit in 2021 and 2022 remains at 26%. It will then go down to 22% in 2023.

Under the current bill, home solar projects that start in 2024 will no longer qualify for the ITC.

How Does It Work?

The ITC is a dollar-for-dollar reduction in the taxes you owe the federal government. For instance, claiming a $3,000 federal solar tax credit reduces your total federal income taxes by $3,000. So, if your owed taxes were initially $5,000, you’d end up owing only $2,000, thanks to the ITC.

Of course, your total tax credits will depend on the sum of the qualified costs of your solar PV system. The good news is that the ITC covers most expenses, from the system itself to its installation. You can even include contractor labor costs and permitting fees in your computation.

Having said that, let’s assume that your qualified expenditures reach a total of $17,500. If your project begins this 2021 or 2022, you can apply the 26% tax credit to that entire amount. As a result, you can claim a total tax credit of $4,725.

What If Your Credits Exceed Your Taxes?

The ITC is non-refundable, which means you won’t get a refund for any credit over your tax liability.

Don’t worry, though, as you can roll over the remaining credits to the following tax year. For example, if you only owe $3,000 in taxes and have $4,725 in credits, you can carry over the excess $1,725 to the next tax year.

Is the Federal ITC the Only Solar Incentive Available?

No, states, and local governments also have their own solar rebates and incentives.

For example, according to Blueravensolar.com/florida/, Florida offers a 100% property tax exemption for renewable energy properties in homes. On top of that is the sales tax exemption for residential renewable energy property.

Other states also provide tax credits on top of the federal ITC. For instance, Utah is currently running its Renewable Energy Systems Tax Credit. This program provides a 25% state-specific tax credit with a cap of $1,200 this 2021, $800 in 2022, and $400 in 2023.

As for individual cities, a perfect example is San Francisco, California’s GoSolarSF incentive. It provides cash incentives to homeowners with qualified solar electric systems. That’s on top of all the other solar rebates and programs available to all Californians.

Take Advantage of the ITC and Other Solar Incentives

There you have it, your guide to what is and how the federal solar tax credit works. Now that you know how much it can save you, it’s time to consider making the switch to solar.

So, as early as now, reach out to your local solar companies. Local installers are your best bet as they can also help you qualify for other state or local incentives.

Ready for more real estate or home improvement guides like this? Then feel free to have a look at our recent and trending news and blog posts!


You may also like