The good news is that the federal solar investment tax credit has been extended with the signing of the Federal government Omnibus spending bill. Some key extensions for the Investment Tax Credit (ITC) are :
- 2-year extension for the residential commercial solar investment tax credit has been extended at 26% through 2022. Now, the phasedown to 22% will occur on January 1, 2023.
- The Sec. 45 production tax credit (PTC)/investment tax credit (ITC), has been extended by one year to December 31, 2021. Projects that begin construction in 2021 will qualify for either the PTC at 60% of its full value or an 18% ITC on the total project cost in the year the project is placed in service.
- The Offshore wind will now have a 30% ITC through Sec. 48 for projects for which construction starts after 2016 through the end of 2025. This change is retroactive, so projects that already started construction after 2016 will be able to access the 30% ITC.
You should note that the federal tax credit for solar system investment not only reduces your tax liability but also can be used to reduce the alternate minimum tax, in case you fall under AMT.
Year wise solar tax credit rates
- 2016 – 2019: The tax credit remains at 30 per cent of the cost of the system.
- 2020-2022: Owners of new residential and commercial solar can deduct 26 percent of the cost of the system from their taxes.
- 2023: Owners of new residential and commercial solar can deduct 22 percent of the cost of the system from their taxes.
- 2024: Owners of new commercial solar energy systems can deduct 10 percent of the cost of the system from their taxes. There is no federal credit for residential solar energy systems.
Is solar tax credit refundable?
Not really! The federal solar tax credit is non-refundable and can only be used to offset your current tax liability. Any extra ( over and above your tax liability ) carries over to future years, as long as the credit still applies in future years. In other words, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year.
Currently, the credit is allowed through 2023. So, a question unclear at this point in time is if solar tax credit that is still left to be adjusted at the need of the year 2023 will be allowed to be set off with tax liability for the year 2024
Solar tax credit calculator
It is easy to understand the aforesaid solar tax credit calculator. Let us say, in 2021, your solar installation costs $30,000. At a rate of 26% of the tax credit, your qualified federal tax credit would be $7,800. If the income tax liability for 2021 is only $3,000. Then, the tax credit would reduce your tax liability to zero, and the other $4,800 ($7,800–$3,000) is carried over to 2022 for adjustment ., .
What type of solar installation qualify for federal tax credit?
Not all kinds of solar installation qualify for the federal tax credit. There are basically two types of solar installation that qualify for this credit. These are :
- Any solar electric property that uses solar energy to generate electricity for use in your main or second residence.
- Any solar water heating property installation in a house located in the U.S. used as a main or second residence where at least half of the energy used to heat water is derived from the sun. Please note that heating water for swimming pools or hot tubs does not qualify for the credit.
The solar equipment must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.
How does solar tax credit work
The solar tax credit in the year during which the installation is completed. It means if you purchase and pay for a system in the year 2021 but installation is completed in 2022, the solar tax credit @ 26% of the cost shall be allowed in the tax return filed for 2022 (in April 2023). But if the project isn’t completed until 2023, the credit will only be 22%. If you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024.
Can I get solar tax credit if I do not own a home?
The answer is Yes! Internal Revenue Code does not provide that the house on which solar property is installed must be owned by you. The only requirement is that you must be a “resident” of that home. Even if you live in your parent’s home, if you pay for the solar system on that house, you can claim the solar tax credit.
How to claim solar tax credit?
Complete the solar tax credit form IRS Form 5695-to know if you qualify for renewable energy credits. If you are eligible, add your solar tax credit information to your tax Form 1040 for the year in which the installation was completed.