There is a lot of debates about how the solar Federal Tax credit works. These tax credits are so important to the financing of your solar system, it is best that everyone educates their self before signing any contacts. Here is a simple Federal Tax Credit breakdown.
Tax Credit Eligibility
To qualify for the 26% federal tax credit, you must meet all of the following requirements:
- Your system must be installed by December 31, 2021.
- You must own your home (renters are excluded, unfortunately).
- Your Federal Tax liability must be sufficient to qualify for the 26% tax credit.
- You must own your solar panels.
This last point isn’t quite as obvious as it might seem, since many homeowners today actually lease their solar systems through third party companies. While leasing may make sense in some situations, it means that the leasing company gets to claim the tax credit instead of you! By contrast, homeowners that buy their panels outright or finance them with a loan do get to claim the tax credit and can use it to buy down loan.
Tax Credit Versus Rebate
It’s important to understand that this is a tax credit and not a rebate. Tax credits offset the balance of tax due to the government (therefore, if you pay no tax, there is nothing to offset and you can’t take advantage of it). Tax rebates are payable to the taxpayer even if they pay no tax. While most people qualify for the federal tax credit, there are some who do not. Anyone who does not pay federal income taxes will not be able to benefit from the tax credit. And, if you’re on a fixed income, retired, or only worked part of the year, you may not pay enough taxes to take full advantage of this credit.
If you do pay sufficient federal taxes the year that you finance or purchase your system, then the credit can be applied to pay off the taxes paid. If you already paid taxes by withholding them from your paycheck, the federal government will apply the tax credit to a tax refund. This refund can be used to pay down the balance on your solar loan. It’s important to note that the tax credit can be carried forward one year, which means that you can use any remainder from this year as a credit towards next year’s taxes.
Homeowner #1 buys a $30,000 solar system, meaning they are eligible for a $9,000 tax credit (30% of system costs). Through their employment they pay the government $9,000 in taxes, but this is withheld on their W-9 so they end up paying nothing when they file. In this example, when the federal tax credit is applied to the $0 balance they pay the government, they receive a tax REFUND of $9,000 that they can then apply to their solar loan – or keep if they choose.
Homeowner #2 also buys a $30,000 solar system but they only pay the federal government $4,500 in taxes because they were on a fixed income. This customer did not withhold any money from their paychecks and pays the full $4,500 when they file. When the $9,000 tax credit is applied, they can only claim $4,500 of it because they only paid that much in taxes. In this example, the customer does not have to pay any taxes that year but they also will not receive a refund check from the IRS.
The upside is that any remaining tax credit can be carried forward and applied to next year’s taxes. In this scenario, if Homeowner #2 pays the government at least $4,500 in taxes for the following year, they can utilize the rest of the credit.
If you have any questions or concerns about your federal tax credit please contact your personal CPA. Solar consultants are not licensed tax experts.