The What, How, and Why of the ITC
Last Updated on
Last Updated January 4, 2021
Solar panels help the environment. However, with the federal solar incentive, they can also save money.
This incentive makes solar affordable, which has increased solar installations in recent years. Since 2006 the ITC has helped solar growth increase by 52 percent annually.
If those installing solar qualify for the tax credit, it can decrease the cost of the system. Before determining who qualifies for the credit, let’s look at what it entails.
What the Solar Investment Tax Credit Entails
The federal Investment Tax Credit, also known as the ITC, includes a dollar-for-dollar credit on federal taxes. This credit takes a percentage of the total cost of the solar installation and pays it to the customer as a tax credit.
This credit only applies to taxes owed to the government. If the customer doesn’t owe taxes, this credit becomes useless to them.
The incentive for this credit depends on two things. First, the type of installation, and second, the year of installation.
Residential and Commercial Solar Tax Credit Tiers
The federal incentive divides into two basic solar installation types. These include residential and commercial/utility-scale installations.
Each year both of these incentives decrease. However, because of the solar ITC extension in 2020, the credit will stay at 26 percent for an extra two years. Then in 2023, it will continue to decrease.
In 2024 the incentive decreases differently. It will no longer exist for residential installations. However, large solar installations will still receive 10 percent.
How to Claim the Federal Solar Tax Credit
To claim this tax credit, it takes a little more than installing the solar array. Individuals with solar power need to file for their tax credit.
To file for the solar incentive, they first need to fill out form 5695. This form determines how much the array’s incentive amount.
It’s best practice to keep the 5695 form in a safe spot so you can easily retrieve it. These forms, along with state and federal TC40 award letters, provide proof of accurate filing.
How the Federal Tax Credit Works
People often confuse how the federal tax credit applies to their solar array. It isn’t an immediate discount; it works more like a mail-in rebate.
Customers who qualify for this credit either pay for the system in cash or use a loan. Then after the tax year, the credit deducts from federal taxes the individual would have owed.
A Solar Panel Tax Credit Carryover?
Unlike some tax credits, this one can carry over from one year to the next. If an individual doesn’t owe the federal government the awarded amount, it will carry over to the next year.
It isn’t certain how many years this credit can carry over. However, it will for sure continue until the credit phases out. As a non-refundable tax credit, an individual will never receive more than they owe in taxes.
Why the Federal Solar Tax Credit is Important
This tax credit has helped the solar industry boom within the last couple of years, though it has an expiration date.
The credit phase down to 22 percent in 2021 would have prevented many homeowners from enjoying the savings of solar. However, because of the pandemic, the solar tax credit extended two years past the phaseout date. This extension gives homeowners who couldn’t qualify for solar before 2021 a chance to invest in this technology.
This tax credit accounts for thousands of dollars in savings. It’s no wonder that those ineligible for the tax credit often forego an installation. Making sure you can qualify for the tax credit while it’s here will optimize your savings.
The Federal Tax Credit for Purchased Solar
The payment option that the individual chooses plays a large role in qualifying for this incentive. For many, the question becomes whether to lease or purchase the solar array. Individuals who install a leased solar array don’t qualify for the federal tax credit.
Instead, this credit goes to the solar company leasing the array.
If you want the savings from the tax credit, it’s best to purchase your solar array. You can do this through a loan or cash.