Free solar panels, the TV ads say. Earn solar panels tax credits from the IRS, they tell you! When you see these ads that allow you to generate your own home solar power, are you impressed? Is Uncle Sam going to pick up 30% of your cost, like they promise? Is it true you only have to come up with the other 70%? Well, that is not necessarily the whole picture.
30% Solar Panel Tax Credit is Real!
It is true, the federal government has a 30% tax credit for the cost of a qualified solar installation. And, some states also have solar panels tax credits or other incentives too. However, the federal credit is non-refundable. It can only be used to offset your current tax liability. If there is any excess it carries over to future years as long as the credit still applies in future years. Currently, the credit is allowed through 2021. This means you may not get all the credit in the first year as you might have been led to believe or assumed based upon the TV ads.
Solar Panels Tax Credit Example
For example, suppose your solar installation costs $25,000. That would qualify you for a solar panels tax credit of $7,500. But what if the income tax on your tax return is only $4,000? Then, the credit would reduce your tax liability to zero. The other $3,500 ($7,500 – $4,000) of the credit carries over to the next year’s tax return. And, the credit will be limited to that year’s tax amount. What if the tax is less than the amount of the credit again for the year it was carried over? The excess credit carries to the following year, and so on, and so on, until the credit is used up or the credit expires.
How do I Qualify for Solar Panels Tax Credit or Energy Credit?
To qualify for the credit, the equipment must be installed in a home that is located in the U.S. This home must be used as your residence. The credit can’t be claimed for equipment that is used to heat a swimming pool or hot tub. If the equipment is used more than 20% for business purposes, only the expenses allocable to non-business use qualify for the credit.
What Does the Credit Cover?
The credit covers both the cost of the hardware and the expenses of installing it. This includes labor costs for on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home. You claim the credit in the year the installation is completed. If you install the equipment in a newly constructed or reconstructed home, you claim the credit for the year when you move in. The credit can be taken for a newly constructed home if the costs of the solar power system can be separated from the home’s other construction costs. The required certification documents must be available.
How Do I Pay for the Solar Panels?
Solar installation companies offer a variety of ways to pay for their systems other than with cash. You could take out a loan.If that loan were secured by your home, generally you are able to deduct the interest on the loan. Another option is to lease the system. In this case you would not qualify for the 30% solar credit. You should note that the lease payments are not tax deductible. In addition, for the lease option, you would have to deal with transferring the lease to the new owner should you decide to sell the home or arrange to pay it off.
What About a Local Government Loan?
Another option available in some communities is loans financed by local government. Loan payments are tacked onto the property tax bill. Generally, this option is at very high interest rates.You should consider other payment methods first. Just because the payments are added to your property tax bill does not mean the payments are deductible as property tax. Only the interest portion of the separately stated amount is deductible as home mortgage interest.
Want to Learn More About Tax Credits on Solar Panels?
Would you like to review your options in more detail? This includes the tax benefits and other aspects of purchasing a solar system for your home? Give Alex Franch, BS EA a call at 781.849.7200. Alex is an enrolled agent with the IRS. He can guide you through the details of what is involved with the energy tax credits behind solar panels or any other tax credits you may have questions about. He will help you with any thoughts, questions or concerns you may have.