Federal Solar Tax Credit
With the current federal solar tax credit, you can claim up to 30% of the cost of your new solar system, including both equipment and installation. Unlike the old credit, which capped out credit payments at $2000, the credit now has no upper limit.* Combined with state and local rebates, this can make a huge difference in how much solar panels cost for your home.
Who qualifies for a federal solar tax credit?
First of all: you need to owe federal taxes to be able to get a credit. The credit just reduces the amount of tax you’ll have to pay, so if you don’t have any tax liability, the credit can’t help you (it will, however, roll over into the next year, so if you’re liable then, you can apply it at that point). It applies to solar systems installed in both existing homes and new constructions, as well as second residences, but doesn’t apply to rentals. The credit is available for systems installed from 2009 through 2016.
If you have a solar lease or solar power purchase agreement (PPA) the credit will actually go to the company you’re working with, rather than to you. That’s because you’re not paying for the equipment yourself. However, some companies will pass on the savings to you by offering free installation. You’ll get the immediate benefit of a lower cost without having to file any paperwork.
What is it?
At this point, you may be asking yourself, “What’s the difference between a federal solar tax credit and a deduction?” (Or maybe you’re not. But trust us: a credit is a good thing). Unlike deductions, which take money off your taxable income and vary in value depending on how much you make, a credit reduces your tax bill by a set dollar amount. Let’s say your taxable income is $60,000 and you’re in the 25% tax bracket. Your tax liability would be $15,000. If you had a $5,000 deduction, that would reduce your taxable income to $55,000, and your tax would be $13,750 — a savings of $1,250. But if, instead, the $5,000 is a tax credit, then it is subtracted from your tax, and you would pay a tax of $10,000 — an additional savings of $3,750.
Calculating the credit
Your solar installation company should be able to walk you through the details of getting the solar tax credit. You can also meet with your friendly local tax professional to calculate the credit you’ll receive (we’re definitely not tax pros here and are just giving some general suggestions). You’ll be using IRS Form 5695. If you’ve received a rebate from your utility for your new solar system, you’ll start by subtracting the cost of the rebate before calculating the credit. So, if your solar system costs $25,000, and you had a rebate for $5,000, you’d calculate your credit based on a $20,000 cost. You’d also subtract state and local government rebates, unless they qualify as “income” for tax purposes.
Rolling over unused credit
As we noted earlier, if you don’t have tax liability, you can roll over your credit into the next tax year. You can also roll over a portion of the credit if you’re only able to use some of it. The credits can be rolled forward until at least 2016, but it’s not yet clear if they will be available for use after that point.
Other solar incentives
States often also offer tax incentives, grants, or loans. Eight states offer rebates as well. For example, in California, one program helps lower-income homeowners get solar panels for a reduced cost or even for free. Solar system owners can also benefit from net metering (when utilities pay for excess electricity going back into the grid) and Renewable Energy Credits / RECS (Read more about Solar Renewable Energy Credits or SRECS). Used together with the federal solar tax credit, these incentives are making solar more and more affordable.
* This is based on information from energy.gov.