The Federal Solar Tax Credit or The Federal Investment Tax Credit (ITC), was passed under the George Bush administration via the Energy Policy Act of 2005. The ITC was created to facilitate the adoption of clean energy. It started as a 30% credit capped at $2,000 for residential projects but that was removed in 2008.
How is the Federal Solar Tax Credit Calculated?
The Federal Investment Tax Credit (ITC) is 30% of the gross system cost of your solar project. That means that if the gross system cost is $20,000, your tax credit would be $6,000 ($20,000 x 30%= $6,000). If there is a utility rebate, or another form of incentive, the IRS will consider the gross system cost to be the post rebate amount.
The gross system cost can include any improvements needed to facilitate the solar installation. This includes any electrical work needed for the installation such as a panel box upgrade and roof work under the solar array. Please speak to your tax advisor for specific advice for your given circumstances.
The credit is a dollar for dollar income tax reduction. This means that the credit reduces the amount of taxes that you own. One of the chief concerns clients voice is they think that since they are expecting a return at the end of the year when they file their taxes that they will not qualify for the federal tax credit. That is not the case! If you’ve already withheld money on your paycheck you may be eligible for a refund. The 30% credit will remain until 2019. After that it will be reduced to 26% in 2020, and 22% in 2021. After that the residential credit will drop to zero.
How Do Solar Loans Affect the Solar Tax Credit?
There are two types of loans in solar as it relates to the tax credit. Type 1 has one monthly payment amount. These loans assume that you will submit your tax credit to them for this monthly payment. If you do not, this will initiate another loan in the tax credit amount at the same APR.
The second type of solar loan is where you’ll have a different payment for year one than for the subsequent years. In this type of loan your payments are based on the entire loan amount. When you receive your federal tax credit you’ll have the option to submit your federal tax credit which will re-amortize your loan to lower monthly payments. You can also keep the federal tax credit and your payments will remain the same. Pick My Solar can help you figure out which of these options are best for you.
How To Claim Your Tax Credit?
To claim the ITC you will need to file under IRS From 5695. You’ll receive your tax credit the following year when you file your taxes for the year in which you installed your panels. If you don’t qualify for the entire tax credit in the first year you can roll over the amount over 5 years.
In conclusion, the federal tax credit is 30% of your gross system cost and is a great opportunity to go green, create clean energy, and save money on home improvement. Now is the time to go solar!