SOLAR INVESTMENT TAX CREDIT
With the signed Inflation Reduction Act on August 16, 2022, one of the many things this act accomplishes is the expansion of the Federal Tax Credit for Solar Photovoltaics, also known as the Investment Tax Credit (ITC). This credit can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system.
The ITC increased in amount and its timeline has been extended. Those who install a PV system between 2022 and 2032 will receive a 30% tax credit. That will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. If you’ve already installed a system in 2022, your tax credit has increased from 22% to 30% if you haven’t already claimed it.
The solar+storage equipment expenses included in the ITC have expanded. Now, energy storage devices that have a capacity rating of 3 kilowatt hours or greater are included.
Accounting for all your solar project costs, your tax processor can total those costs and use 30% of that sum to lower your taxes. For example, you end up paying $35,000 for your solar energy system. That would give you a $10,500.00 solar tax credit, and you’ll pay $10,500.00 less in federal taxes.
You will get a 30% credit based on your solar system’s total cost, including all the items listed above. You can use this 30% to offset taxes owed, and if you already paid this amount through tax withholdings on your paycheck, you can get it as a refund!
We recommend consulting with your tax professional to ensure you are filing everything correctly. We are not tax professionals, but we provide our customers with the documents and direction they need to get the most out of their solar investment, including this solar power tax credit.
Understanding Federal Solar Investment Tax Credits (updated):
To qualify for the 30% Federal Tax Credit:
Install your solar system during the year 2022 or after.
You must own your home.
You must pay or owe federal taxes in order to use the tax credit.
You must own your solar, and it must be new. (Leases Not Allowed)
Tax Credit vs. Tax Credit Refund
It is important to understand that this is a federal solar investment tax credit, which means you must pay or owe federal tax. Typically you pay this through your paycheck if you are a W-2 employee. You can only use this tax credit to offset taxes owed or create a refund of taxes already paid through payroll in the installation year. You can not get the money that you did not pay in or owe, meaning you have no tax liability. For example, if you are on permanent disability and it is non-taxed, you have no taxable income, and therefore the tax credit may not apply. However, you can go backward and pay off any owed taxes from previous years.
Qualifying for the Solar Tax Credit
Employees with paychecks usually pay taxes through payroll automatically, creating a refund or liability depending on elected withholdings, which are adjustable at any time. You can pay more to the IRS by increasing your withholdings resulting in a larger refund, or you can pay less and withhold the same amount you would get refunded. Instead of paying money to the IRS, divert that money toward the solar system.
If you are self-employed, you typically pay taxes owed on a quarterly or annual basis. You can use the tax credit to offset taxes you owe, and instead of paying money to the IRS, you divert that money toward the solar system.
It’s simple, give it to the IRS or Keep it yourself!
It’s important to note that the tax credit can carry forward, which means you can use any remainder from this year as a credit for future years.
Solar ITC Example 1:
Homeowner #1 buys a $35,000 solar system, meaning they are eligible for a $10,500 residential energy tax credit (30% of system costs). They owe the government $10,500 in taxes through their employment wages, but the withheld amount was through payroll, so they end up owing nothing when they file because they already paid the liability owed. In this example, when applying the solar tax credit to the $0 balance they owe the government, they receive a tax REFUND of $10,500. They can then take this and apply to their solar loan and pay it down. You are getting to keep $10,500 of your own money.
Solar ITC Example 2:
Homeowner #2 buys a $35,000 solar system, meaning they are eligible for a $10,500 residential energy tax credit (30% of system costs). They owe the government $10,500 in taxes through their employment wages, but this customer did not withhold any money from their paychecks and still owes $10,500 when they file. They will apply for their $10,500 tax credit and offset the $10,500 of taxes owed, which leaves zero taxes owed. In this example, the money they would have had to pay the taxes offsets due to the tax credit, but now that money is available to buy down the solar loan.
If the tax credit is greater than your overall tax liability (taxes owed), then you can carry this over to further years. You can also use tax credits to pay back taxes owed, meaning you can go backward.
Solar ITC Example 3:
Homeowner #3 buys a $35,000 solar system, meaning they are eligible for a $10,500 residential energy tax credit (30% of system costs). They are retired and enjoys the money saved from the 401K fund; anytime the homeowner withdraws from this fund, the appropriate income tax can be offset with the money in the tax credit earned from the solar project.
If the tax credit is greater than the taxes owed in the transaction, then they can keep deducting on future withdraws until the tax credit is gone.
How do I use the tax credit to pay down my Solar loan?
You have a 30% solar tax credit amount to utilize, and you can wait till you get a refund or accumulate the funds through higher payroll deductions. You can pay your solar loan down anytime within 18 months, and the finance company will lower your balance resulting in a lower payment. If you have enough cash on hand equal to the 30% tax credit and you’re in a position to apply it to the loan upfront, this will give you a smaller loan and payment and interest savings right now. You reimburse yourself when you receive the tax credit from the two options above.
How do I claim the Federal Tax Credit?
Important Disclaimer: We understand how the tax credit works, but we are not tax advisors. This information is only for your reference. Everybody has a different financial and tax situation, and the above is intended as an example only. Always talk with your tax advisor.