Consumer guide to federal solar tax credit options
With the energy prices going up at a constant rate, going solar might be the answer. Solar energy allows for a self-sustainable energy source, one that has the potential to save you quite a bit of money. Furthermore, there are several federal solar tax credit options to allow for easier acquisition of the required equipment. To get the most out of your federal solar tax credit, it is recommended to read up on reviews for tax reduction services and choose the best option for your situation. But what exactly is the federal solar tax credit, who is eligible for it, and what are your options? You can find the answers to those questions right here, in this article.
What is the federal solar tax credit?
Solar energy presents a power source that is both very abundant and infinitely renewable. Well, perhaps not infinitely, but you may as well treat it as such. In 2005, the U.S. government created the U.S. Energy Policy Act to allow taxpayers to “go solar” and get a tax credit by doing so. This credit will provide you with a direct reduction against your federal income tax. It is one of the best eco-friendly ways to reduce your taxes. The federal solar tax credit, also known as the solar investment tax credit, provides the recipients with the ability to recoup 26% of their solar equipment purchase and installation costs. However, this credit is due to be reduced to 22% in 2023. Furthermore, come 2024, the federal solar tax credit will only apply to commercial solar energy systems, at a rate of 10%.
So what that means is that you have a strict time limit if you want to utilize this credit for your home or business. Currently, the best time to purchase and install solar equipment is by the end of 2022. That will get you the maximum tax credit. That being said, the government is not averse to extending this deadline, as they have done so in 2020. So even if you do not manage to go solar this year, it may very well happen that you will get another chance.
The last thing to note about the federal solar tax credit is that it is non-refundable. This means that it will count against your income tax for the year but if you do not have any tax lien, you will not get a check from the IRS. That said, you have the option to carry the credit forward for up to five years.
Who is eligible for the federal solar tax credit?
Currently, everyone who owns a solar energy system is eligible to benefit from the federal solar tax credit. As mentioned previously, if your federal solar tax credit happens to be larger than your total tax liability for the year, it is possible to roll it over into the next and subsequent years, up to the five-year threshold. Provided, of course, that the tax credit is still in place by then. All income brackets are eligible to get solar tax credit but you have to be the owner of the system. Simply signing a lease or a PPA with a solar company is not enough to make you eligible to claim the credit.
The specifics of solar tax credit eligibility are as follows:
Your system had to be installed before January 1, 2006, and no later than December 31, 2023. The system itself needs to be installed in your primary or secondary residence within the U.S. You also need to own the solar system. You are eligible for the credit if you took a loan to purchase your solar equipment but not if you sign a lease or a PPA. Under Section 25D of the Internal Revenue Code, taxpayers are also eligible for the federal solar tax credit if they own a part of an off-site community solar project. Lastly, the solar system itself needs to be used for the first time or be brand new. This means that if you purchased property that already had solar equipment on site, you will not be eligible for any solar tax credit from that equipment.
Federal solar tax credit coverage
Not everything that has to do with solar energy will get you a tax credit. The only things that the federal solar tax credit covers are the cost of solar panels, labor costs associated with the installation, additional equipment, home batteries, and any sales taxes that may be applicable when you make your purchases. The reason why the federal solar tax credit is one of the most popular tax deductions is the fact that the credit covers all the installation costs such as inspection costs, permit fees, developer fees, and similar. Furthermore, you will get 26% off all the additional inverters, mounting hardware, wiring, etc.
Another thing to note is that, while you do get the credit for home batteries, they need to be charged by your solar tax system. You will be asked to prove that all the batteries that you include in your tax claim are charged by renewable energy from your solar system alone. If the batteries are charged by the grid, they are not considered to be renewable and will therefore not be eligible for the credit.
Federal solar tax credit options
If you are looking to maximize your federal solar tax credit, you may want to combine it with some of the following options:
- Tax exemptions
- Subsidized loans
- Cash rebates
- State tax credits
- Performance-based incentives
- SRECs (Solar renewable energy credits)
- Business Incentives
Depending on your state and municipality, you may be able to exclude the value of your solar system from the property tax assessment. What this means is that the value that your solar system adds to the property will not increase your property tax bill. Some of the best states for property taxes include Hawaii, Alabama, Louisiana, and Wyoming. Additionally, some states even offer the possibility to purchase solar equipment without paying any state sales tax on it.
Another way to pay for your solar system is through subsidized loans. This particular loan has a reduced interest rate. It is offered either directly by the state, by a utility company, or by a non-government organization. However, these loans are limited in availability so you might want to be on the lookout for them.
Investment tax credits
This is your bonafide 26% federal solar tax credit. For most people, this is the best option when it comes to installing a solar system.
Another great option to reduce the cost of your solar system is the cash rebate that you can get in certain states. These rebates are usually available only for a short period of time but are one of the best federal solar tax credit options. Additionally, once a set number of solar systems is present in the state, the cash rebate option disappears entirely. If you live in an area that offers cash rebates, they can help you reduce the cost of the system by as much as 20% more.
State tax credits
If you live in a state that allows it, you can pair the federal solar tax credit with a state tax credit. This will allow you to apply the solar tax credit to your state taxes as well as federal taxes. Before you do so, it is advisable to get a bit more information on federal taxes vs. state taxes vs. local taxes. If you do it correctly, you will basically get two times’ worth of your solar tax credit.
This option will have you get tax benefits depending on the amount of solar energy that you produce. The incentive rates are determined at the time of the installation, and they can exist alongside any other net metering policies.
SRECs (Solar renewable energy credits)
If you happen to live in a state that offers solar renewable energy certificates (SRECs), you can get an additional income from your solar system. You generate SRECs simply by creating energy through your solar panels. It is then possible to sell these SRECs to utility providers and get hundreds or thousands of dollars in income. It depends on the SREC market, of course, but the potential is there. The reason why utilities purchase your SRECs is compliance with renewable energy requirements at the state level.
Lastly, businesses have special incentives when it comes to solar energy. The first incentive is accelerated depreciation. This reduces the tax burden as well as accelerates the solar return investment. Overall, this incentive has the potential to reduce the cost of the solar system by as much as 30%. Another incentive for businesses is the MACRS tax benefit. This is available in a few states and can reduce the payback period as well as the overall tax burden. Lastly, businesses can get a 100% bonus depreciation for their solar system for the first year of its usage. However, by the end of 2022, this is one of the federal solar tax credit options that will no longer be available. If you are looking to take advantage of the bonus depreciation, the best time to install the solar system is now!
For more information on popular tax credits, tax deductions, and the best tax companies, refer to Consumer Opinion Guide. We always stay up-to-date with the current tax events and are your #1 choice for consumer tax information.