One of the most attractive aspects of solar power is being able to significantly reduce your energy bill. It’s not unusual for our customers to see their bills drop by at least 75% after installing a solar power system, and there are other financial incentives for going solar. One of the best incentives currently offered is the ITC, or Investment Tax Credit.
What is the Investment Tax Credit?
The Investment Tax Credit—often referred to as the Solar Investment Tax Credit—is offered by the federal government to people who purchase solar power systems for their homes or commercial properties. It’s important to note that this isn’t a deduction, which simply reduces the amount of taxable income you have. Tax credits directly reduce the amount of money that you owe to the government.
Imagine that you make $60,000 in 2020 and owe $3,000 in taxes. A tax deduction of $3,000 would reduce your taxable income to $57,000, reducing your owed taxes only slightly. On the other hand, a tax credit of $3,000 is applied directly to the $3,000 in taxes owed, reducing the tax bill to $0.
How much is the ITC worth?
The value of the ITC depends upon when you qualify for it. Through December 31, 2019, the credit is worth 30% of the total cost of installation after deducting any utility or state rebates. (Note: you do not need to deduct any state tax credits—only rebates which reduce the amount you pay for the system.)
Costs eligible for the ITC include:
- The cost of the actual system
- Labor costs for the preparation, assembly, and installation of the system
- Permitting fees, inspection costs, and development fees
- Wiring, inverters, and mounting equipment
- Sales taxes on all eligible expenses
But this 30% rate isn’t set in stone. Beginning January 1, 2020, the credit will drop to 26%, and on January 1, 2021, the credit will drop to 22%. At the start of 2022, the credit will no longer be available to homeowners.
How do you qualify for and claim the tax credit?
The IRS is a little vague as to what stage of installation establishes the date of ITC eligibility. It’s generally understood that it applies to the date on which the system is approved to operate, though some tax professionals advise playing it safe and using the date on which the system is connected to the local grid by your utility. (Note: If you lease your solar power system, the owner of the system will receive the ITC, not you.)
It’s important to keep in mind that the ITC is not a rebate. If you do not pay taxes, you cannot qualify for the ITC. However, if your tax liability is less than the value of the credit, you can roll the remaining credit over into future tax years (for as long as the ITC is in effect) in order to realize the full value of the credit.
You can claim the credit if you buy a new home with a solar power system installed. In this case, the date you qualify for the credit is the date on which you move into the home. However, you must be the home’s original owner, or be the first user of the system.
How you claim the credit depends upon how you do your taxes:
- By hand: Fill out and attach IRS Form 5695
- Using software: Most popular tax software suites include the option to apply for the solar ITC.
- With a tax accountant or processor: Inform the tax professional handling your taxes that you have had a solar power system installed.
Disclaimer: Regardless of how you handle your taxes, we strongly advise referring to a tax professional. While we are experts at solar power system installation, we are not tax experts. Considering the financial significance of this tax credit, it’s worthwhile to do your due diligence.
If you’re considering purchasing a solar power system for your home, and you would like to learn more about how the solar ITC works, contact Capital City Solar by calling 916-782-3333, or send us a message using our contact form!