If you have installed a solar photovoltaic (PV) system on your home or purchased an interest in a community solar project, you may be eligible for a federal tax credit that can help you save money and go green.
The solar tax credit, also known as the investment tax credit (ITC) or the Residential Clean Energy Credit, allows you to deduct a percentage of the cost of your solar system from your federal income taxes.
The current rate of the credit is 30% for systems installed in 2020-2022, and 22% for systems installed in 2023. The credit expires starting in 2024 unless Congress renews it.
However, what if you don’t owe any taxes or owe very little taxes during the year that you install your solar system? Can you still benefit from this incentive?
The answer is yes, but you need to understand how the solar tax credit works and how to claim it correctly.
How is the Solar Tax Credit Paid Out?
The solar tax credit is paid out as a reduction of your federal income tax liability, which can be carried forward to future years if you have no or low tax liability in the year of installation.
The solar tax credit is a nonrefundable credit, which means that it can only reduce your tax liability to zero, but not create a refund.
For example, if you owe $5,000 in taxes and claim a $6,000 solar tax credit, you will not owe any taxes, but you will not get a $1,000 refund either.
Therefore, if you have no or low tax liability in a given year, you may not be able to use up your entire solar tax credit in that year.
However, there is a way to still take advantage of your full solar tax credit even if you don’t owe enough taxes in one year.
You can carry forward any unused portion of your credit to future tax years until it is exhausted or until the credit expires.
This means that you can apply your remaining credit to reduce your future tax liability as long as you still own your solar system and meet other eligibility criteria.
This way, you can still benefit from your solar investment if you expect to have higher income and taxes in the future.
For example, suppose you install a $20,000 solar system in 2020 and claim a $6,000 solar tax credit (30% of $20,000).
However, your tax liability for 2020 is only $3,000. You can use $3,000 of your credit to offset your taxes for 2020 and carry forward the remaining $3,000 to 2021.
If your tax liability for 2021 is $4,000, you can use $3,000 of your carried forward credit to offset your taxes for 2021 and carry forward the remaining $1,000 to 2022.
If your tax liability for 2022 is $5,000, you can use $1,000 of your carried forward credit to offset your taxes for 2022 and exhaust your entire solar tax credit.
How to Claim Solar Tax Credit?
To claim the solar tax credit, you need to fill out Form 5695 (Resources:https://www.irs.gov/credits-deductions/residential-clean-energy-credit) and attach it to your federal income tax return.
You also need to keep receipts and invoices of your solar expenses and proof of installation date and ownership. You can use Form 1040 (Resources:palmetto.com/learning-center/blog/everything-you-need-to-know-about-the-solar-tax-credit) or Form 1040-SR (Resources:turbotax.intuit.com/tax-tips/going-green/federal-tax-credit-for-solar-energy/L7s9ZiB4D) to report your total credits and reduce your tax liability.
If your tax liability is lower than your credits, you can carry forward any excess amount to future tax years until it is used up or until the credit expires.
The solar tax credit is scheduled to expire at the end of 2023 unless Congress extends it or makes it permanent.
There have been several proposals to do so, such as the Renewable Energy Extension Act and the Growing Renewable Energy and Efficiency Now Act.
However, none of them have been passed into law yet. Therefore, if you want to take advantage of this incentive, you should act soon before it is too late.
The solar tax credit is a valuable benefit that can help you save money and go green with solar energy. It is not a one-time opportunity per taxpayer, but rather per project.
You can claim the credit more than once if you install solar systems on different properties or in different tax years, or if you purchase an interest in a community solar project.
However, you need to follow the rules and requirements of the credit and claim it on your federal income tax return. You also need to be aware of the expiration date of the credit and any possible extensions or changes in the future.
For more information about the solar tax credit, you can visit the following resources:
• Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics www.energy.gov/sites/default/files/2021/02/f82/Guide%20to%20Federal%20Tax%20Credit%20for%20Residential%20Solar%20PV%20-%202021.pdf from the U.S. Department of Energy
• Residential Clean Energy Credit www.irs.gov/credits-deductions/residential-clean-energy-credit from the Internal Revenue Service
• Frequently Asked Questions About the Solar Tax Credit www.solar.com/learn/how-does-federal-solar-tax-credit-work/ from Solar.com
FAQ
Q: Does the solar tax credit affect state and local incentives?
A: No, the solar tax credit does not affect state and local incentives for solar energy. You can claim both the federal credit and any other incentives that are available in your area.
However, some state and local incentives may require you to reduce your eligible costs by the amount of the federal credit. You should check the rules and regulations of each incentive program before applying.
Q: Does the solar tax credit apply to battery storage?
A: Yes, the solar tax credit also applies to battery storage systems that are charged by solar energy. However, there are some conditions that you need to meet to qualify for the credit.
For example, your battery system must have a capacity of at least 3 kWh, must be installed after January 1, 2023, and must be used primarily for your home’s electricity needs.
Q: What are the signs of a qualified solar system?
A: A qualified solar system is one that meets the following criteria:
• It uses solar photovoltaic panels or cells to generate electricity for your home.
• It is new or being used for the first time. You cannot claim the credit for a used or refurbished system.
• It is owned by you or financed by a loan that you are responsible for repaying. You cannot claim the credit for a leased system or a power purchase agreement.
• It is located at your primary or secondary residence in the United States or at an off-site community solar project that credits your home’s electricity consumption.
• It is placed in service during an eligible year (2020-2023). The system is considered placed in service when it passes city inspection and is ready to use.