Congress has voted to extend the solar tax credit for homeowners through 2021. Homeowners, solar companies, and industry advocates alike were given a big Christmas gift in 2015 when Congress approved the 2016 federal spending bill and extended the solar panel tax credit. The December 18 bill contained a 5-year solar tax credit extension, which makes solar more affordable for all Americans. Wondering how this impacts you?
What is the solar tax credit?
The federal solar tax credit, also known as the investment tax credit (ITC), allows you to deduct 30 percent of the cost of installing a solar energy system from your federal taxes. The ITC applies to both residential and commercial systems, and there is no cap on its value.
Here’s an example: You pay $25,000 to install a solar system on your home in 2015, which means you are eligible for a $7,500 federal solar tax credit. If your federal tax liability for 2015 is only $6,000, you will owe no federal taxes that year, and in 2016, you will reduce your tax liability by $1,500.
What does the federal solar tax credit extension mean for the solar industry?
The federal ITC was originally established by the Energy Policy Act of 2005 and was set to expire at the end of 2007. A series of extensions pushed the expiration date back to the end of 2016, but experts believed that an additional five-year extension would bring the solar industry to its full maturity. Thanks to the spending bill that Congress passed in late December 2015, the tax credit is now available to homeowners in some form through 2021. Here are the specifics:
- 2016 – 2019: The tax credit remains at 30 percent of the cost of the system. This means that in 2017, you can still get a major discounted price for your solar panel system.
- 2020: Owners of new residential and commercial solar can deduct 26 percent of the cost of the system from their taxes.
- 2021: Owners of new residential and commercial solar can deduct 22 percent of the cost of the system from their taxes.
- 2022 and onward: 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.
Additionally, in previous years, owners of new solar energy systems could not claim the tax credit unless their system was operational. Now, the legislation allows them to claim it as soon as the construction of the system begins, as long as it is operational by December 31, 2023.
Do I qualify for the solar panel tax credit?
As long as you own your solar energy system, you are eligible for the solar tax credit. Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect.
How do I claim the solar tax credit?
You claim the solar tax credit when you file your yearly federal tax return. Remember to let your accountant know you’ve gone solar in the past year, or if you file your own taxes, complete IRS Form 5695, “Residential Energy Credits,” and include the final result of that form on IRS Form 1040.
More resources on the extension of the federal ITC
Read the Wall Street Journal article about the new legislation on the ITC bill and what it means for you.
