Guide to Understanding Federal Tax Credit 2021
To have a full understanding of how the federal tax credit can benefit you, in regards to solar energy, you need to know what it is and how it works—officially known as the Solar Investment Tax Credit proposed in 2005 as a part of the Energy Policy Act. Ever since its inception, it has been a popular tool to reward the use of renewable energy. However, with many extensions already taking place, the solar tax credit is scheduled to cease in two years (2022). Today, we’ve put together a renewable energy guide to understanding federal tax credit for 2021.
The federal tax credit for solar energy works by allowing taxpayers to claim credit after having solar panels installed for the home—this credit set at a certain percentage of your solar paneling costs.
Your home’s solar panels also need to be operational before New Year’s Eve 2019 to receive a credit of 30%. For 2020, that percentage will drop to 26%, and finally, for 2021, the tax credit will end at 22% unless it gets renewed by Congress.
How to Find Out Tax Credit Eligibility
For you and your home to be eligible to receive a tax credit for utilizing solar energy, you need to fulfill these obligations first:
- Installation occurred after January 1, 2006, and no later than December 31, 2021
- The renewable solar energy source can be found at the designated residence
- You are the primary owner of the solar panels and paid for it directly
- The solar energy source has to be a new or unused system
The IRS mandates that only an initial install for the solar tax credit. Including all of the associated expenses that also went into it. A few of these expenses involve:
- All taxes and costs included in the purchase price
- The solar panel and cells that power home equipment
- Equipment for system balancing such as the inverters, wiring, and hardware for mounting
- Total costs for labor that takes place for the entire installation process including preparation and equipment
- Devices used for storing the energy produced directly from the solar cells or panels regardless of when they were purchased, or if they were obtained in an unqualified tax year period when the renewable energy system began.
Obtaining an Electric Utility Rebate
You may be wondering if installing solar power panels will enable you to obtain rebates from your local utility provider for tax purposes. Unfortunately, they don’t recognize deduction purchased as income tax. What you would do to take advantage of the refund would be to include it in your system’s overall costs before your tax credit is determined. With this amount involved, one can calculate the number to resolve your tax credit amount.
State Tax Discount
As opposed to discounts from a utility provider, any refund obtained from your state does not affect your credit. This reasoning is due to the tax systems for state and federal levels being separate and governed individually.
Applying for Tax Credits from a State
Although you can add tax credits, they will not decrease your confidence at the federal level. The same works for federal loans are not affecting your state credits. If you decide to add the state credit, you will increase your taxable income on the national level due to decreasing your state taxes.
To get the most out of your tax credit, it is best to have it taxed at the federal level. This step will eliminate any hassle of trying to calculate the federal tax credit and your state tax credit amounts.
Amount of Time Your Tax Credit is Good For
As mentioned earlier, the federal tax credit for solar energy will be eliminated after 2021 unless renewed by congress.
So in a little under a year, the 26% credit that is enjoyed by many will be history, so when you get around to doing your taxes this year, make sure to include it before it’s too late.
The federal tax credit percentage for solar power systems gradually decreased for all residential purposes. At the end of 2020, the 26% credit will reduce to 22% for the entire year. Then, from 2022 on, there will no longer be a solar tax credit for private homes.
The good news is that there is still time to claim the current credit amount for the year as soon as it gets installed. So it would behoove you to finish connecting your solar power system if you have not done so already. Adding the tax credit makes your investment in renewable energy that much more worth it in the long run.
Steps to take to claim the Tax Credit
Now that you have a thorough understanding of how the tax credit works and how to take advantage of it let’s go over the steps involved.
First, you need to ensure that you maintain all of your receipts that involve your solar power system. This step is crucial because you need to prove that you have what you are claiming to have. Plus, you want to make sure that everything is accounted for so that you can take advantage of the full 26% tax credit. To give you an idea of the type of expenses you can claim, here are a few examples.
- Costs for permits
- Fees for permits
- Rental or leased equipment costs
- Renewable energy consulting fees
- Fees for engineers, electrician, and installers (if you don’t plan to have it installed yourself)
- Costs for any shipping
- Rented or purchased tools
- Costs for the solar panels and equipment
- Costs for screws, nails, bolts, and wiring
The exact cost for everything that you need will differ, especially how you decide to go about your install. Plus, even if you don’t feel comfortable doing it yourself, you can bring a professional in to get the job done and then claim the labor.
However, if you decide to be a DIY type, remember that your labor cannot be claimed! Regardless of that, your savings will still be significant.
Filing Your 5695 and 1040 Together
With all of your receipts and proof gathered, you can now sit down and have it all organized on your IRS Form 5695 to receive the full 26% credit.
Filing your taxes and including the tax credit is quick and straightforward when you follow the steps below.
- Safeguard all of your receipts for EVERYTHING from the moment that your install begins
- Double check your tax credit eligibility. Chances are you will be eligible if you find that you owe taxes.
- Fill out the 5695 form and total up the credit amount.
- Transcribe your tax credit information into the designated 1040 section.
By following this guide to understanding federal tax credit for 2021, you will be taking advantage of a financial incentive that helps both you and the environment.