As Tax Season approaches and we get ready to collect our W2s and 1099’s, we also look for expenses we can deduct so we pay as little in taxes as possible. One of the ways to get a significant tax credit is to go solar. The Federal Government is currently offering a Solar Tax Credit, also known as the Investment Tax Credit (ITC). If you pay income taxes you are almost certainly eligible to take advantage of this credit, whether you are a homeowner or a business owner. Best of all there is no cap to the credit you can receive. In this blog post we will dig deeper into the 2020 Solar Tax Credit and explore its benefits and limitations.
History of the Solar Tax Credit
The Investment Tax Credit was first put into place through the Energy Policy Act of 2005. This federal policy caused a surge in popularity of solar energy installations in the U.S. and created hundreds of thousands of jobs in the industry, helping the American economy. The federal tax credit was supposed to decrease to 10% in 2015 for all solar systems, but thanks to the overall popularity of the credit, it was extended for another 7 years! Due to the increased popularity of this credit, the amount of homeowners installing solar panels on their roofs have been growing exponentially every year!
Homeowners who were able to install their systems in 2019 qualified for the 30% Tax Credit. The current value of it in 2020 decreased to 26%. That number will drop to 22% next year, only to phase out completely in 2022 for residential systems. However it will remain permanently at 10% for commercial solar installations. That being said, there is still time for homeowners who did not look into the benefits of going solar to take advantage of the ITC. We are actually curious to see what will happen to the credit when 2022 knocks on our door!
What is the Solar Tax Credit?
The federal government allows homeowners who purchase solar systems to deduct 26% of the value of the system on their tax returns. If the system is leased, you are unable to claim this credit. The Solar Tax Credit is based on the tax liability of the homeowner. Basically the IRS will not refund you more than you have paid in taxes, but thankfully the credit can rollover to the next year. For example, if you solar system cost $30,000 before the tax credit, you are eligible for $7,800 (26% of the total gross cost) in Tax Credit. Now, if your tax liability is $6,000, then you will get $6,000 the first year, and will be able to roll over $1,800 for the next year. If your tax liability is higher than your tax credit you will get a full credit the same year.
How can you claim the tax credit?
If you purchased your system in 2018, then your tax credit form would have to appear on your 2018 Tax Return. The same is true for systems purchased in 2019 except you would be filing it now. In order to claim the tax credit, you or your CPA will have to fill out form 5695, which you can access here. In order to properly complete the form, you will need a paid receipt for your installation. The solar company you purchased your system from should be able to provide you with that. Then, you and your CPA can fill out the form, which is fairly simple and straightforward. After filling the form out, you will then add the credit to the appropriate Credit portion on your 1040 form. In the new form case, the solar tax credit will go to Schedule 3 on your 1040 form.
What happens with the credit that was unclaimed?
If you filed your 5695 form in 2018, and your tax liability was lower than your tax credit, you have a remainder credit that needs to be rolled over to your 2019 tax return. REMEMBER to do that so you do not lose your credit. This credit was placed on the form in number #12. If you are filing now, and will not be able to claim the full credit make sure that your CPA places the roll over credit in line #16.
If you forgot to claim your Tax Credit last year, make sure to speak to a Tax Professional who can amend your tax return for the past 3 years. That money is YOURS, do not give up on it!
Join The Solar Community
The tax credit is now in effect, and is set to expire in 2022. Make sure that you take advantage of this opportunity and lower your overall cost as much as you can. Make sure that the credit is claimed for the year that the system was completed. The Sun is there for all of us everyday, and it will not charge us to use its sun rays to generate electricity for years to come! Take advantage of it and start Saving!
If you have any other questions or you need help filling your Tax Credit, let us know so we can help!
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