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How Does the ITC Work for Solar?

Jessica PirroJanuary 13, 20205440

What is the Federal Solar Tax Credit?

When you get a solar power system, 26% of your total project costs (which include the equipment, permitting and solar panel installation) can be claimed as a credit on your federal tax return. If you spend $10,000 on your solar power system, you are going to owe $2,600 less in taxes the following year. The solar tax credit is set to expire in 2022.

How Does the Investment Tax Credit Work for Solar?

We will explain below how the investment tax credit work as a solar incentive, so everyone can understand how the investment tax credit works for solar panels.

What is the Investment Tax Credit for Solar?

When you get a solar panel installation the federal government is going to reward you with a tax credit that will help when investing in solar panels.

A tax credit is going to be a dollar-for-dollar reduction of the income tax that you owe. A $1 credit is going to equal $1 less that you are going to pay in taxes. Yes, it is going to be that simple.

Aa an example, we will say that you owe $5,000 in federal taxes this year. If you claim a $3,000 tax credit, that will pay off part of your liability. You would only be left to pay $2,000 back in taxes after the credit is applied.

It is going to be different than a refund because you have to owe taxes to claims this solar incentive. But since most people are going to owe taxes, most people are going to end up being eligible for this solar incentive.

How Much Money Will I Save With the Federal Tax Credit?

As of today, the Solar Investment Tax Credit (ITC) is worth 26% of the total cost of the solar power system. This is going to include the value of solar power equipment and solar installer fees for the solar panel installation.

If it is going to cost you $10,000 to buy and install your solar power system, you would be owed a $2,600 credit.

You will only be allowed to claim the solar tax credit if you own your solar power system. This is the reason that a lot of solar installers advise against leasing solar panels. If another company leases you the solar power system, they still are going to be the ones that own the solar panel installation equipment, therefore they are going to be the ones benefit from this solar incentive.

You are still going to get the benefits of cheap solar power. But you will miss out on the solar tax credit, which is going to be a huge blow to getting a positive ROI from your solar power system.

It is going to make more sense to finance instead. You’re still on the hook for a solar loan, but you retain rights to the solar incentives that are going to make solar panels a sound investment.

How Long Will the Federal Tax Credit Stay in Effect?

The federal investment tax credit is going to eventually expire. But first, the federal government is going to begin by trimming back on its 26% tax credit solar incentive.

The credit is going to step down in value over the next few years until it eventually disappears completely for residential solar panel installation customers in 2020. Below is what is forecast for the solar tax credit in the next few years.

- 2020: 26%.

- 2021: 22%.

-2022: 0% (10% for commercial solar panel installations).

The good news is that homeowners can claim the credit the same year that they complete the solar panel installation.

The solar tax credit is going to play a major part in the return on investment that you will see when you get a solar panel installation. Sure the solar investment tax credit isn’t going to be around forever, the good news is we are still going to have another year to capitalize on the full 26% credit.

How Will You Claim the Federal Tax Credit?

Alright, not that we are at the part that homeowners are going to want to know, how are you going to be able to claim the tax credit?

First things first, keep all of the receipts from the start of the solar panel installation process to the finish. The more that you spend on your solar panel installation, the larger your credit is going to be, so you are going to want to keep track of everything.

Here are some of the expenses that you will be able to claim:

- The solar power systems equipment.

- Freight shipping costs.

- Professional solar installer consulting fees.

- Electrician fees.

- Engineer fees.

- Tools that are bought or rented.

- Wiring, screws, bolts, nails, etc.

- Solar power equipment that is purchased or rented (scaffolding or a man-lift).

- Permitting fees.

- Permitting services costs.

The cost of solar is going to vary depending on the approach you are taking to your solar panel installation.

How to File Form 5695 With Your 1040 Individual Tax Return

After spending the money, you are going to need to prove it to the government (which is why you should keep all of the receipts) to claim the solar tax credit. To do so, you need IRS Form 5695 to claim the residential energy credit.

If you file your taxes, use the steps below to claim your Residential Renewable Energy Tax Credit.

- Gather all of your expenses receipts and put them in a safe place.

- Confirm you are eligible for the tax credit. (If you do own the solar power system and owe taxes, you will most likely be eligible. Check with a tax specialist if you’re not sure.)

- Complete IRS Form 5695 to add up your renewable energy credits.

- Add your renewable energy credit information to your typical form 1040.

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