Federal solar income tax credit or ITC was designed to encourage people to switch to clean energy. It started with 30% credit on total solar panel system cost and today has stepped down to 26% as of January 2020. The residential solar ITC gets stepped down to 22% from Jan 2023. From 2024, the ITC gets totally eliminated for residential purposes but the commercial projects will enjoy 10% tax credit.
Eligibility of solar ITC
- You own the house.
- You own the PV system purchased using solar loan or cash. [PPA or lease financing options are not eligible for tax credit claims].
- You have sufficient Federal tax liability.
Understand the significance of solar ITC claims
The step down in ITC percentage can make a huge difference. For example, For a 9 kW PV system the average cost is $27,000.
- If it was installed in 2019, then at 30% the tax credit you could claim was $8,100.
- If it was installed in 2020, or will install in 2021 & 2022 then at 26% the tax credit you could claim can be $7,020.
The difference is around $1,080, which may seem less but you are ignoring the extra savings like for solar batteries and a new roof. These can be claimed on tax credit, which can add to another $1300. If you are waiting to switch to solar, then move quickly to maximize savings before ITC reduces again by 4% in 2023.
How solar ITC gets calculated?
The overall system installation cost can include enhancement needed for allowing PV installations. It includes panel box up gradation and even roof work. The credit is dollar for dollar IT reduction, which reduces the owed tax amount.
Many homeowners assume that they get tax returns, so are not eligible for ITC. It is a wrong belief! You are a committed tax payer and if you get a tax deduction and make an ITC claim the same year, your ITC gets added to the tax return amount.
Is 26% ITC refundable?
Unfortunately, 26% ITC is non-refundable tax credit. Tax credit means deduction from your owed tax amount. However, you can carry it one year forward in your books until 20 years. Use it when you have tax liability for the next 20 years.
How to claim federal solar ITC?
It is wise to seek professional tax advice to ensure you are eligible. To file your ITC, you need 2 IRS forms – 1040 and 5695. You will need to attach the solar installation agreement copy and other related expense receipt. Make sure that you safely document all the receipts associated with the solar installation project.
A paper trail is necessary, so keep track! You are allowed to claim for solar equipment, shipping cost, installation charges, electrician fees, permit charges, tools rented/purchased, and even the cost of wiring/bolts, nails, screws, etc. Hiring contractor allows making a claim, but DIY does not.
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