What Is the Solar Tax Credit (And How Does It Work?)

The United States government has been searching for ways to encourage homeowners to switch to using renewable energy as the primary source of power for their homes. The incentive that they've developed was coming up with a tax credit program to encourage more people to switch to using solar energy within their homes.

Did you know that the First Solar tax credit was introduced in the Energy Policy Act in 2005?

If you've just been introduced to the idea of a solar tax credit, there are a ton of questions that you might have. What exactly is the solar tax credit? How can you benefit from it?

We've got all of the answers to the questions that you have in this guide.

Keep reading to learn more!

What Is the Solar Tax Credit?

In 2020, the solar tax credit allows homeowners to deduct 26% of the entire cost it took to install the solar energy system. At this current time, there isn't a maximum value of a system that you can install in your home.

The solar tax credit is applicable to both commercial solar system installations and residential solar system installations. You can claim the costs of the system that you install on your federal tax return.

The tax credit that you will receive will be dollar for dollar, meaning that 26% of the exact amount that you spend on the system installation will be reduced out of the income tax that you owe. This means that if you spend $20,000 on installing your system, you will owe the government $5,200 less for your income taxes.

You should be aware that the credit you receive towards your federal taxes isn't the same as a refund. This is because you will have to owe income taxes to be able to benefit from this tax credit incentive. However, since the majority of Americans owe taxes, it means that most homeowners are eligible to benefit from the federal solar tax credit program.

How Much Can You Expect to Save?

The solar tax credit is worth 26% of the total cost of installing your system. This total value will include the fees for installation, the total value of the parts, and any repairs/upgrades (replacing your roof or upgrading your main electrical service panel) needed to install the solar system.

You should be aware that you're only eligible for this credit if you own the system that's being installed. If you want to claim the benefits of this tax credit program, you should avoid leasing the solar energy system if possible.

By leasing the solar energy system, it means that the company that your leasing from will still legally own the equipment. This means that they will be able to claim all of the tax incentives. While you will still be able to reap the benefits of a lowered energy bill and using renewable energy, you won't be able to benefit from this tax program.

Instead of leasing your solar energy system, you should consider financing instead. While you'll still be responsible for paying back the entire day as alone, you will retain the rights to the solar energy system. This means that you will still be able to reap the benefits of the solar tax credit program.

How Long Will the Federal Solar Tax Credit Be Available For?

The federal government began reducing the tax credit incentive that is offering homeowners in the United States in 2020. Prior to 2020, the tax credit was actually 30%.

In the next few years, the total value of the credit incentive that you'll be able to claim will slowly decline. In 2021, you can expect to receive a 22% credit on your federal income. In 2022, the federal tax credit will be 0% for homeowners and will be 10% for any commercial projects.

It's not too late for you to take advantage of the 26% that the federal government is offering for 2020. You will be able to claim your solar energy credit for the same year that you have the installation completed.

How to Go About Claiming the Federal Solar Tax Credit

It's highly recommended that you keep all of the receipts that you receive from the beginning of your solar energy installation, all the way to the end. The more money that you end up spending on your solar system installation, the larger of a credit that you'll receive. You need to keep track of all of the paperwork you have, as this will prove to the government how much you legitimately spend on your project.

The cost that you are allowed to claim for your federal solar tax credits include:

  •  Freight shipping costs
  •  Electrician fees
  •  Solar equipment
  •  Engineer fees
  •  Tools rented
  •  Tools bought
  •  Permitting fees
  •  Permitting service cost
  •  Nails, wiring, screws, bolts
  •  Equipment rented
  •  Contractor labor expenses
  •  Equipment purchased

While the exact amount that you end up spending on purchasing a solar energy system and having installed will vary, this list gives a good idea of everything that you're allowed to claim on your federal tax return. Be mindful that if you self-install your solar system, you won't be able to claim the time you personally spent on the project towards your tax credit.

Understanding How to Take Advantage of the Solar Tax Credit Program

We hope that you have found this guy to be useful in understanding how to take advantage of the solar tax credit program.

Are you looking to take advantage of the 26% tax credit for your 2020 federal income taxes? We're here to help. Click here to schedule a consultation to learn how we can make having your own solar system easy!

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