Is the Solar Tax Credit Refundable?
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Everyone wants to get a check at the end of tax season, but some of us end up having to send a check instead. With the federal solar tax credit (the federal ITC), you won’t have to worry about sending in a check — but does that mean you’ll be getting a check? It depends. While the federal solar ITC is technically non-refundable, there are ways that it can get you a check in your mailbox.
What Is a Tax Credit?
The first thing to know about the ITC is that it’s a tax credit, not a deduction. A tax deduction applies before taxes, reducing the amount of your income that is considered taxable by the IRS. The less taxable income you have, the fewer taxes you’ll have to pay at the end of the year. With sufficient deductions, you could theoretically bring your taxes owed to $0. Tax credits work in the opposite way. Instead of applying before you calculate your final taxes, they apply afterward. In this case, you would calculate the total amount of taxes you owe, then apply the credit to the amount you owe. Some tax credits roll over, so if you don’t use it all in one year, you can apply it to your taxes in the next year.
3 Basic Points to the Federal Solar Tax Credit
- Presently, the federal ITC is worth up to 26 percent of the price of your solar installation through 2022. In 2023, the amount drops to 21 percent. After 2023, the only eligible installations will be business projects, which will receive a 10 percent credit.
- Secondly, the ITC rolls over. Should you have leftover credit available at the end of the year, you can apply it to next year’s taxes.
- Thirdly, the ITC is applicable to cash purchases of home systems and financed solar PV systems. You do not have to purchase your installation in a single transaction to qualify for the credit. This is particularly important for many homeowners, as financing solar installations is one of the most popular ways to purchase.
Refunds on the Solar ITC
So now that we’ve got the basics, let’s cover some of the ways in which you can get a refund by utilizing the solar ITC, even if the credit itself is non-refundable.
Is Your Employer Holding Back Taxes?
Most Americans have their employer hold their taxes back from their paycheck automatically. This makes it much easier to calculate your taxes at the end of the year, instead of having to become your own accountant. While the amount held back varies based on your income level, most will have hundreds to thousands of dollars held back in income taxes.
This is where the ITC comes in. The ITC is worth 26 percent of the cost of your installation — not just the panels, but also solar components such as your inverter, the racking system, and even a battery backup system like the Tesla Powerwall, assuming you charge the battery backup system with only renewable energy. The federal ITC has no dollar amount cap.
Now, let’s say you have a solar installation worth $20,000. The federal ITC would then be a tax credit worth $5,200. This gets applied to your total taxes owed after they have all been calculated, reducing the gross amount of your taxes owed by $5,200.
If you make $85,526 a year (the minimum amount of the fourth federal income tax bracket), then you’ll owe $14,605.50 for your federal taxes that year. Your employer will likely be holding this out of your paycheck for you. Now that you have your federal ITC worth $5,200 and apply it to your $14,605.50 held back, that means that you would only actually owe $9405.50.
The additional $5,200 that your employer held back would need to be returned to you. This means that you’ll be receiving that $5,200 in taxes back — which is essentially a refund.
What Happens If There’s Leftover Credit?
There are some situations where the solar ITC would not bring you a full refund, however. If we take the $5,200 amount from before and apply it to someone who only owes $3,000 in taxes, they will not get the additional $2,200 of value back in their pocket. Instead, the credit will reduce the amount owed to $0, giving you that $3,000 back, and then will go roll over to the next year when you can apply the remaining amount of the federal ITC to that year’s taxes.
This is a big difference compared to a refundable tax credit. With a refundable tax credit, if the $5,200 took you below $0 you would get your $3,000 back, but then the IRS would send you a check for the remaining $2,200 that same year.
To maximize your returns with the federal solar tax credit, you need to owe some amount of income taxes. If you do not owe any sort of income tax — perhaps because you receive social security or your main source of income is from property — then the federal solar tax credit will be completely worthless to you because of its non-refundable nature.
It is for this reason that Go Solar Group discourages you from going solar if you do not owe federal income taxes. The ITC is one of the main reasons why solar has gotten increasingly affordable over the past several years. Without that tax credit, your solar installation will become much more expensive than it would otherwise be.
What About State Level Solar Tax Credits?
We’ve spent the bulk of this article covering the federal solar tax credit. As a federal tax credit, it applies to all qualified Americans regardless of which state they live in and therefore needs the most explaining. However, there are some state-level solar tax credits that qualified individuals can obtain alongside the federal tax credit. Let’s cover a couple of those here.
Getting a Refund From the New Mexico Solar Tax Credit
The New Mexico solar tax credit initially expired in 2016, only to be brought back into law by Governor Grisham in 2020, who wishes to spur increased investment into renewable energy in New Mexico. This is part of Gov. Grisham’s focus on the environment.
The New Mexico ITC Solar Market Development Tax is similar to the federal ITC in most ways, particularly in that both credits are non-refundable. The main difference between the New Mexico solar tax credit and the federal solar tax credit is that the state-level credit has a hard dollar cap — $6,000. Additionally, instead of being worth 26 percent of your solar installation’s value, it is only worth 10 percent.
Because there is a limit to how many dollars the credit can be worth, the state will assign you whichever of these values is lower. If 10 percent of your system is $4,000, then you’ll get that. If 10 percent of your solar installation is $7,000, then you’ll receive the $6,000 cap.
Despite this amount being less than the federal solar tax credit, the fact that you can qualify for both the New Mexico state tax credit and the federal solar tax credit can bring you a lot of savings. Much like the federal ITC, the New Mexico ITC will not give you money if it reduces your state income taxes below $0, but it can cancel out your state income tax completely for the year and get that money back in your pocket. Additionally, there are sales tax exemptions on solar equipment and services for which New Mexico residents can qualify.
Getting a Refund From the Arizona Solar Tax Credit
Arizona has a program that is very similar to New Mexico’s, with some minor changes to the actual amounts. With the Arizona solar tax credit, the credit caps at $1,000 or 25 percent of the value of the system, whichever is lower. Like the other credits in this article, it will also roll over if you don’t use the full amount in a single year, with a maximum of five years.
The way to get a refund on this credit is similar to the others in that you’ll get your withheld taxes back if the Arizona solar tax credit covers the cost of your state taxes for the year. While this amount might not be as large as the federal or New Mexico credits, it’s still a tidy sum of cash coming back into your account.
This tax credit, and other solar incentives available in Arizona, are some of the reasons why we consider Arizona to be one of our top states for solar this year. Armed with this information, we hope that you will be able to make an informed decision about whether going solar is right for you. Make sure to check out the other available incentives to make sure you’re maximizing your savings.