2021 ITC Phase Down

Federal Solar Tax Credit
Last Updated on
2021 ITC Phase Down

Americans are more aware of the need to decrease their carbon footprints. However, without the right price tag on solar energy, some homeowners won’t strive for energy independence.

The Energy Policy Act of 2005 addresses the issue of renewable energy costs. It provides tax incentives and loans for different clean energy types, including solar panels for homes.

This Act paved the way for other renewable policies and technology advancement that has decreased the cost of solar via the investment tax credit (ITC) in 2006 for commercial and residential solar. Since the ITC was extended in 2008 two years after its introduction, it has helped many individuals and organizations benefit from solar-powered homes.

How Does the Federal Solar Tax Credit Work?

Those who qualify for the ITC receive a dollar-for-dollar credit. This solar tax credit deducts a percentage from the cost of solar and takes it out of the solar owner’s federal taxes owed.

This credit, however, isn’t immediate. The customer purchases the system, then file for the federal tax credit the following tax year.

Another particularity of the ITC includes how to obtain it. Although it’s a dollar-for-dollar credit, recipients don’t receive a lump sum.

Solar Tax Credit Carryover

Those who owe less than their tax credit only get what they currently owe in federal taxes for that year. The rest rolls over from one year to the next until used. How long paying out the tax credit will take depends on how much the solar owner owes each year.

Do I Qualify for the Solar Tax Credit?

To qualify for the credit, individuals first need to own their solar arrays. Leased solar systems receive this tax credit. However, the credit for leased systems goes to the solar company that owns it, not the homeowner.

Secondly, applicants need taxable income.

Thirdly, although it may seem obvious, it still needs stating. People can’t receive this tax credit if they don’t have solar panels. To qualify for solar panels, homeowners need a qualified roof, good credit or the ability to pay in cash; and an average of 500-kilowatt-hours of monthly electricity usage, which equates to 6,000 kilowatt-hours annually.

How the Federal Tax Credit is Changing in 2021

Unless you follow solar news, you may not know that this solar tax credit won’t last long. Meaning those who don’t install solar before the end of the year will end up paying more.

Currently, the ITC covers up to 26 percent of the cost of solar. For many installing solar, this credit saves thousands of dollars.

The ITC, however, will decrease to 22 percent after December of 2020. Those currently considering solar only have a couple of months to install a solar array.

What the Solar Phasedown Means for Residential Solar

Solar has become more than a way to help the environment. The savings from the ITC have made it cheaper than fossil fuels. However, those who don’t install solar before it steps down will miss out on some of these savings. Those considering solar shouldn’t hesitate. If you want solar, but want to wait until it’s affordable, that isn’t the right strategy since now’s the best time to invest.

Not only does a solar loan have no up-front costs, but the monthly payments replace the electricity bill, meaning it doesn’t cost anything extra. Over the life of the system, it ends up costing far less than projected utility-supplied electricity costs. The math works out because the loan term ends within 10 to 15 years, the system has a 25-year warranty, and the solar panels have the potential to last for 40 plus years.

It’s simple economics. Traditional, coal-based power still powers most American homes, but it is an increasingly scarce resource with limited supply. This means prices for electricity powered from these sources will continue to rise. Given the consumer misperception that there are not alternatives to traditional coal-based power electricity, it is likely that this traditional power source will remain economically inelastic (not subject to a change in demand with price increases). Therefore, the more the public knows about solar and sooner, the more money they’ll save.


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