Thanks to the federal solar tax credit initiatives, there hasn’t been a better time to invest in solar energy. With a solar energy system installed at your home, you can claim the tax credit and enjoy cheap, virtually free sustainable electricity.
Whether you’re a homeowner or a business, making the switch to solar energy can be the most profitable move for the next few years, and you can enjoy solar tax credit.
So, while you’re looking for ways to invest sustainably, solar system installation presents a great opportunity for homeowners and businesses alike.
According to the figures from last year, you are eligible for a 26% tax credit on your solar power system. Yes, you heard it right.
You can earn more than a quarter of the tax credit on your newly installed photovoltaic system.
More importantly, can you claim solar tax credit twice?
How about earning a tax credit twice a year?
So, can you claim solar tax credit more than once a year?
In this post, find out what is a solar tax credit and how you can go about making credit claims.
Table of Contents
- What is the Federal Solar Tax Credit?
- Federal Solar Tax Mechanism
- Solar Tax Credit Limit
- Does Power Purchase Agreement (PPA) Get You a Solar Tax Credit?
- How Long Will Federal Solar Tax Credit Last?
- Is it Possible to Claim Solar Tax Credit Twice?
- Liability Costs and Federal Solar Tax Credit
- Tax Eligibility Criteria
- Installation Date
- Solar Panel Location
- Original Solar Installation
- How to Claim Solar Tax Credit?
- Determine Your Eligibility
- Gather the Documents
- Fill Out the IRS Form 5695
- Why Is the Solar Tax Credit Ending?
- Solar Tax Credits on Rental Property
- Solar Tax Credit Against Alternative Minimum Tax
- How Can Solar Panels Help Save Money?
- How Will Solar Tax Credit Work in the Future?
What is the Federal Solar Tax Credit?
Here is a quick word on what the solar tax credit means for all those readers who just found out about the solar tax credits.
Solar Tax Credit is also called ITC. It’s worth 26% federal tax credit of the total cost of your solar energy system. So, if you are liable for federal income tax and purchased your solar panels through cash or loan, you are eligible to apply for the tax incentives.
However, you cannot claim any tax credit if you purchased the system through leasing or PPA (power purchase agreement) financing.
Federal Solar Tax Mechanism
Those eligible for the solar tax can avail a 26% credit on their solar panel cost. These taxes are claimable during the year when you install the solar panels.
This means that you get credit for installing solar panels if you have purchased them. The amount of tax eligible applies to:
- Cost of equipment
- Cost installation
The tax applies to your income tax liability, and you can roll it over for five years.
Solar Tax Credit Limit
The best thing about these tax credits is that they are off-limits, which is a big encouragement for anyone who wants to convert to a solar energy system for their home or business.
It also means that the solar federal tax credit is a flat 26% regardless of the investment size. A flat solar investment tax credit rate makes it easier for businesses that want to scale up and increase their energy generation.
This presents a great opportunity, especially for states with no scarcity of solar energy.
Likewise, it will allow homeowners to reduce their utility costs to get a decent return on their efforts for clean and green energy.
Does Power Purchase Agreement (PPA) Get You a Solar Tax Credit?
If you purchase a new home with a solar power system, you can claim the ITC for the year when you move in. However, if you’re leasing solar power and purchasing electricity through Power Purchase Agreement, you are not eligible for the IRS solar tax credit.
In this case, the solar company that sells you the electricity will be eligible for the credits.
Anyone wishing to claim the credit should first consult with a tax professional to ensure eligibility. It’s smart to speak with an advisor before making a major investment you intend to claim on your taxes.
How Long Will Federal Solar Tax Credit Last?
It’s one of the critical things to consider because federal tax credit on solar panels won’t last forever. So if you want to make the most of the tax credit, now is the right time. At the start of the solar tax credit initiatives, the federal government offered a flat 26% credit.
However, it also aimed to phase out the federal solar rebates sequentially.
So, after the end of 2022, the solar tax credit rates will drop to 22%. Moreover, it’s expected to drop further in the subsequent years as solar energy systems become more common throughout the country.
It’s one of the reasons why investing in solar becomes more critical for 2022.
Since the installation cost is considerably higher, it presents a good opportunity for the consumers to get some tax refund and offset the installation and purchase cost. It’s a socially responsible investment that will pay back in the long run.
Is it Possible to Claim Solar Tax Credit Twice?
Technically speaking, you cannot claim the tax credit twice, especially if you’re a homeowner. But, there is always an option to roll over the remaining amount to the next year.
You can carry the amount forward for up to five years. However, tax credit twice may be an option for those who own more than one home. For instance, if you install a new solar system on another property, you can claim the solar credits separately.
The general rule suggests one tax credit for each solar energy system. However, it’s slightly more complicated than it sounds.
In such cases, a tax professional will better guide you about how to claim solar tax credit twice and if you can even do that.
Liability Costs and Federal Solar Tax Credit
The federal solar tax is a nonrefundable tax credit. Unfortunately, this means that tax refunds are not available if your liability is less than the tax amount. But the good thing is that you can rollover the remaining amount to the next year.
This cycle can continue for up to five years to provide tax relief to those with smaller liabilities. Another critical aspect suggests that you can carry the ITC forward for up to 20 years. This is possible according to section 48 of the Internal Revenue Code.
According to this section, even if you don’t have a tax liability this year, you can claim the credit for your liabilities during the last year.
Tax Eligibility Criteria
Other than buying your solar panel through cash or financing, the federal solar tax credit is applicable for people who fit the following requirements:
If you installed the solar energy system between 1st January 2006 and 31st December 2021, you are eligible for the solar tax credit. It means that you’re just in time to invest in renewable energy and earn handsome credit for your efforts.
Solar Panel Location
The federal solar tax credits apply to U.S based residential locations. So, if your solar energy system is in the U.S., you can avail yourself of the residential solar tax credit.
Original Solar Installation
Make sure that your solar system is new or installed for the first time. Reinstallation on a different location doesn’t qualify you for the federal solar tax credit.
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How to Claim Solar Tax Credit?
While you cannot apply for the solar tax credit twice, you can claim your tax amount to rollover next year. However, you first need to apply for a tax credit claim.
The process is quite technical but pretty simple too. In a broader view, claiming tax credit requires the following steps:
Determine Your Eligibility
First up, make sure you are eligible for claiming the federal solar tax credit which is part of the many federal solar incentives. If you adhere to the minimum eligibility requirements that we just mentioned, you can claim the solar tax after you install solar panels at your home.
It’s also advisable to seek professional tax advice if you find it difficult to understand your eligibility for your solar panel tax credit.
Residential vs. Commercial Applicants
The tax claim methods for residential and commercial consumers are slightly different. If you are a commercial solar investor, you can claim a tax credit for solar energy under Section 48. The tax credit applies to your business taxes too.
On the other hand, if you have one or more residential solar power systems, you can claim the solar tax under Section 25D. These taxes may be claimed against income taxes.
Gather the Documents
Once you fulfill the eligibility requirements, gather some essential documents to proceed with your federal tax return claim. Here is what you will need:
- IRS Form 1040
- IRS Form 5695
Fill Out the IRS Form 5695
The IRS Form 5695 is a critical document to claim the solar tax. So, let’s look at a quick guide on filling this document.
Remember, this is only a guide and not tax advice, so it’s also a good idea to seek advice from a tax professional if you feel confused or are doing it for the first time.
Guidelines for Filling the IRS Form 5695
While you are filling the IRS Form 5695, here are some of the salient features worth noting:
- Enter your solar panel cost, including the installation costs. Ensure that the figures are accurate, as mentioned in the purchase and installation receipts.
- You will also add solar water heating property, wind energy property, and geothermal heat pump cost.
- When you get the total cost for different solar panel applications and properties, calculate 26% of the total cost or multiply the total amount by 0.26.
- Next, you must fill the Residential Energy Efficient Property Credit Limit Worksheet.
Why Is the Solar Tax Credit Ending?
Congress passed the Spending bill in December 2015, which meant that homeowners could enjoy the state tax credit on the residential solar panels. The duration of this tax credit was from 2016 to 2021.
Unfortunately, the tax credit may not be applicable for future solar panel installations unless the state has new recommendations.
Solar Tax Credits on Rental Property
You can claim a solar tax credit for rental properties under section 48. This will apply as a business tax credit, but it’s best to seek professional financial guidance to claim a rental property tax credit.
On the other hand, if you have a vacation home where you live for 25% of the year, you can claim 25% of the total credit due on your solar power system.
Solar Tax Credit Against Alternative Minimum Tax
If you meet the minimum requirements for the federal income tax, you can also use the solar tax against the alternative minimum tax. Therefore, these renewable energy credits can be a useful way to reduce your annual taxes on income.
How Can Solar Panels Help Save Money?
While there are some smart alternatives to solar panels, very few things compare to the longevity and cost-efficiency of solar energy systems. Before the federal solar tax credit was possible, solar panels would save money in the long run by cutting off your utility bills.
However, given the cost of purchase and solar panel installation, you would have to wait for years to balance the initial cost.
Thanks to the solar investment tax credit initiatives, you can make up for your solar installation cost a lot quicker than before. Moreover, it compensates a decent percentage from your annual tax, so you pay less for your taxable income and other liabilities.
For an average homeowner, the federal investment tax credit on solar systems could save up to $5000 annually, which is a considerable cost reduction for an average American.
How Will Solar Tax Credit Work in the Future?
As we saw earlier, the solar tax credits will end soon, but there is something for those installing a new solar energy system in 2022 and 2o23. So, if your construction project begins in 2021 or 2022, you are still eligible for a 26% federal credit on your solar taxes.
Moreover, for constructions in 2023, there will be a 22% tax credit. It’s important to note that there will be no residential tax credits after 2023. Also, commercial tax credits will drop to 10%.
As the world moves towards green energy initiatives, it’s high time for residents in the US to adopt green energy solutions like a solar power system.
Not only do they provide free energy, but they can also prove to be a profitable green energy investment and help reduce your taxes for at least a year.
Even though there are more technicalities while claiming for the federal solar tax credit twice, options like roll over for up to five years are a great one in case the solar tax credit exceeds your liabilities. It’s a win-win for everyone, so it’s time to get a solar panel system for your house and avail the benefits today.
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