What is the Solar Investment Tax Credit?
The Investment Tax Credit (ITC) is a 30 percent federal tax credit for solar systems purchased and
installed on residential and commercial properties. For residential installations, the ITC would be applied to the homeowner’s income taxes. The credit is available once the solar system is turned on and fully functional on the homeowner’s house. Take note that there is a difference between a rebate and a credit.
How does the solar ITC work?
As a tax credit, the homeowner will take the amount directly off the amount of tax money owed, rather than as a deduction from their taxable income. Simply speaking, a tax credit is a dollar for dollar reduction in the income taxes that the person or company would otherwise have to pay the government.
The amount of the ITC is dependent on the total cost of the purchased solar for that individual’s property. Both residential and commercial ITC is equal to 30% of the net cost of the solar installation. The individual can claim the credit for their primary residence, a vacation home, and for either an existing structure or a new construction.
Here is an example of how the tax credit works:
Joe just had a $37,000 solar system installed on his house. He had a total of $20,000 in incentives for his solar system, to go along with the 30% ITC. Remember that the 30% ITC would go toward the net cost of the system, and not the gross cost. After filing his taxes that same year, Joe finds out that he owes the IRS a total of $5,200. From the total amount of $5,200 owed, after using the 30% tax credit how much would Joe owe the IRS?
- Gross Cost $37,000
- Incentives -$20,000
- Net Cost $17,000
- ITC Total (30%) $5,100
Joe then files his taxes and uses his ITC towards the total amount of money owed.
- Amount of taxes owed $5,200
- ITC Total (30%) -$5,100
- Total amount owed $100
Joe owes the IRS a total of $100. Not bad considering that he would have owed a total of $5,200. Only dependent on the cost of the system, there is no restriction or limit to the dollar amount of the credit.
Filing requirements for solar credits
To claim the credit, the homeowner must file IRS Form 5695 as part of their tax return. The credit needs to
be calculated on the form, and then entered on their 1040.
If the total amount of the ITC outweighs the total of the income taxes due, there will not be return from the IRS.
Here is an example of taxes owed being less than the total amount of your ITC:
Let’s assume that Joe owes the IRS a total of $5,000, and has an ITC total of $5,200. The total amount of the ITC will cover the total amount of owed money, and still have an excess amount of $200. This $200 will not be returned to Joe. Remember to plan your taxes accordingly with any future plans of going solar.
Keep in mind, we are the solar professionals not tax advisers. Please consult a tax professional before filing your taxes.
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