Understanding The Solar Energy Federal Tax Credit And FAQ
Were you aware that you can claim a tax credit on your solar panels? If you are new to the solar energy industry or are considering installing solar panels before 2020 is up, now is a perfect time.
You can receive a tax credit on your next filing in 2021 that is up to 26% of the solar panel project’s entire cost! This credit includes any permits, installation, and equipment claimed on your next tax return. For example, if you claimed a $10K project for your solar panels, you will receive a $2.6K credit back.
Please note that this article is not intended for a professional financial guide or tax advice. It is straightforward to give clarity, information, and common frequently asked questions regarding the Federal Solar Energy Tax Credit.
Details On The Solar Panel Tax Credit
A solar panel tax credit is a credit claimed on your federal tax return that is a percentage of the solar system’s cost. There are currently two types of solar tax credit: commercial and residential. The ITC, aka The Solar Investment Tax Credit, was introduced in 2005 with the Energy Policy Act of 2005.
To put it, if you install a solar energy system before the year 2020 is up, or before December 31, 2020, and claim it on your next return, the federal government will give you back 26% of the total project costs. However, if you wait to install a solar panel, it will drop to 22% for 2021 and cease to exist in 2022 unless renewed through congress.
How To Qualify For The Solar Power Credit?
Please understand that there are a few qualifications to obtain the credit before you proceed with your taxes. Here are a few that are required:
- You must install the system from January 1, 2006, through December 31, 2020.
- The system must be wholly owned by you and not leased through another company.
- You must own the home where the solar panel system is installed.
- You can not claim more than the amount of taxes you owe, as it is a “non-refundable” credit. However, you can break it up and forward the remaining sum on to the following year.
- Your tax liability has to be sufficient to qualify for the credit. Meaning this is a tax credit based option and not a tax rebate. If you do not pay federal taxes, then you won’t be able to qualify. If you are on a fixed income, part-time worker, or retired, you may not have paid enough taxes to be eligible for the credit.
Here is an example of a qualified individual: A individual invested $50k into a solar energy system and installed it on their own home before December 31, 2020. They are eligible to receive a $13k solar panel tax credit (26% of their project costs) on their next return. They ended up paying $13k federal taxes in their employment from withholdings to pay $0 on their return. However, when the credit is applied, they can receive a refund of $13k because they have already paid the full amount of taxes through withholdings.
On a side note, if that same individual was working part-time and only paid $7k on withholdings for federal taxes, the $13k credit is applied. $7k can be officially claimed, and they will not receive a refund in this scenario because they would have had to pay more or the exact amount in federal taxes to take full advantage of the solar panel credit. They can also choose to apply the remaining credit of $6k on the next year’s tax return as long as they incurred that amount of taxes through the year they are claiming.
The tax credit is to help offset the overall balance due to the government. So if you do not owe or pay enough taxes, you will not be able to take full advantage of the solar energy tax credit.
Federal Solar Tax Credit Savings
Currently, the amount of the solar tax credit is at 26%. The credit includes the entire project costs from equipment, installation, contractor fees, and parts. It is vital to consider getting the solar panel system before the deadline to make the most out of the tax credit or make the highest savings possible.
The tax credit incentive allows homeowners to get solar panels and a system installed at a lower cost. To top that off, by adding solar to your home, you will already be saving on your monthly electricity, which makes it ideal to have in every home. Why not get the system set up for a lower cost now, to save you more in the future?
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Common Questions Regarding The Solar Tax Credit
Many questions are arising from individuals considering the Solar Tax Credit. Here are a few frequently asked questions with answers:
Can I use the solar energy tax credit against the minimum tax?
- Yes, the tax credit can be used on federal or alternative minimum tax credit.
What is the final date that the solar tax credit will be available?
- The credit for a 26% solar panel tax credit will end on Dec 31, 2020. You can claim this on your 2020 return. However, if you choose to claim 2021 Federal Tax Credit on your 2021 return, it will be 22%, which ends on December 31, 2021. Further review and consideration from congress have to be made if there is any hope for the credit to extend. Currently, the final date of the entire credit is January 1, 2022.
Are there any expenses?
- Yes. You will need to own and install the solar panel system before claiming the credit. You may have contractors fees or parts costs, but the system needs to be installed before the credit can be claimed.
What expenses can I claim?
- When you choose to claim the federal solar tax credit, it will require a paper trail of your expenses. The more you spend on your project, the larger your credit will be, so keep a record of everything you pay for. Our freight shipping costs, electrician fees, engineering fees, tools bought or rented, equipment purchased or even rented, permits and service fees, solar equipment including solar panels, and consulting fees are claimed. Even if you hire a contractor, that is an additional expense that is claimable.
Can I claim the credit if I’m not connected to the electrical grid?
- Yes. The solar panel system doesn’t have to be officially connected to the electrical grid. As long as the system generates electricity for the presidency, you can use the solar panel tax credit.
I connected The Solar Panels to my property but not on my roof. Can I claim the solar panel credit?
- Yes. The solar panels need to be located on the property and generating electricity, but not necessarily on the roof.
Can I claim the credit if I have a home office that is also part of the commercial location?
- Yes, however, when residency and commercial buildings are combined, the credit may be more complicated. As long as the solar panel system is used for more than 80% of the residential side, the credit can be claimed. If the solar panel system is used less than 80%, then a certain percentage can be used to calculate the tax credit. The business side can essentially be eligible for a solar panel business tax credit.
I have bought all the parts and pieces of my solar panel system but have not had installed them. Can I claim the solar panel tax credit?
- No. Only solar panel systems generating electricity and installed during the year can be claimed through the solar panel credit.
I am a homeowner who bought a new home in 2020 that already had a solar panel system installed when built in the previous year. Can I still claim the solar panel tax credit?
- Yes. As long as the original builder did not claim that the home was constructed, you can claim the tax credit in the year that you moved into the house.
Can I claim the credit if the solar panel system is not installed on my primary home?
- Yes. You can claim the solar panel tax credit as long as you own the home and own the solar panel system. It does not have to be your main home.
How can I claim the Residential Renewable Energy Tax Credit Or The Federal Solar Tax Credit?
- The easiest way to claim your federal solar tax credit is to speak to a financial professional and obtain a form 5695 and form 1040. The instructions are relatively easy to fill out; however, you can find the instructions for form 5695 on the IRS government website if you need assistance.
- Once you obtained the IRS Form 5695to gather all the expense receipts and confirm that you will be eligible for the tax credit by entering it into the forms before you submitted with your return.
What are some of the takeaways with a solar panel tax credit?
- There are a few takeaways that individuals need to consider. One is that the ITC federal tax credit equals 226% of the costs of the overall solar panel system installation completed in 2020. The credit itself is decreased to 22% for installations completed in 2021 and will cease activity in and after 2022. Lastly, if you are a homeowner who doesn’t pay taxes when you install a solar panel in the owned home, they will not qualify for the tax credit.
Does the solar tax credit make solar more cost-effective?
- Yes. The solar tax credit decreases the overall solar panel installation costs after it is completed and installed when the solar panel tax credit is claimed. If you choose to get your solar panel set up for December 31, 2020, you can take full advantage of the 26% tax credit as long as it generates electricity.
- However, if you wait until the following year, the tax credit amount will get reduced to 22% until December 31, 2021. Going solar also has other incentives with your state guidelines and electric companies that you can take advantage of to make the solar panel installation more cost-effective.
Final Thoughts On The Solar Panel Tax Credit
In conclusion, a solar tax credit is a great way to reduce the overall amount of cost when moving over to solar energy for your residency. No matter the size of the project, whether you choose to install a $5000 Solar panel system to a $50,000 solar panel system, the best way to get a return on investment is through the federal solar tax credit.
It is highly advised to consider getting your solar energy system set up before December 31, 2020, to make the most out of the 26% tax credit. If you wait until after December 31 of 2020 through December 31, 2021, complete your project. In 2021 Federal Tax Credit will be reduced to 22%. After January 1, 2022, the solar tax credit will need reconsideration from Congress to get extended.
Suppose you’re looking to save on overall electric costs and add solar to your home. In that case, this is the best time to speak with a professional about your options while making the most out of any state incentive or federal tax credits from solar panel systems. You have any additional questions to find the resources of the federal statuettes and IRS guidelines IRS website.