What is the Solar Tax Credit?
Officially, the IRS calls this the "Residential Energy Efficient Property Tax Credit." It's stated on Form 5695. The credit allows you to deduct 30% of the cost of a solar panel (photovoltaic) system. This cost includes both materials and labor. Let's use a simple example. If you paid a company $10,000 to install solar panels on your roof, then the tax credit is $3,000 ($10,000 x 30% = $3,000).
For businesses, a similar 30% credit is available, but it's called the "Business Energy Investment Tax Credit." It's also known as ITC.
For the sake of this article, I'll be speaking mainly about the "Residential Energy Efficient Property Tax Credit," and for simplicity's sake, I'll be referring to it as the "Solar Tax Credit."
Myth #1: I'll get my Solar Tax Credit as a check in the mail after I buy my system.
The truth is you have to claim the Solar Tax Credit when you file your income tax. So if your solar system was placed in service in 2017, you (or your tax filer of choice) would have to fill out IRS Form 5695 and include it with your 2017 tax form. The responsibility rests on the homeowner to file for this tax credit.
EnergySage.com sums up this point really well:
The [Tax Credit] does not work like an up-front ‘discount’; it is not applied to the cost of your system at the time of purchase. Instead, you pay for the system up-front... and then it is your responsibility to claim for the [Tax Credit] when you file your taxes.
Myth #2: The Solar Tax Credit is refundable.
The truth is that the Solar Tax Credit is not refundable. The IRS spells it out explicitly in their own FAQ:
The residential energy property credit is non refundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.
Whoa. What does it mean when a tax credit is "non refundable?"
Usually, taxpayers in the US land into 2 categories: those who the IRS pays a refund and those that owe money to the IRS.
If you paid the IRS more than what you owe, then the IRS will send you a refund check. The tax credit has the potential to be used in future tax years to reduce your tax liability. This is known as a carryforward.
If you owe money to the IRS, then the Solar Tax Credit can help reduce the amount that you owe. For those of you who are tax accountants or just tax-saving geniuses, you can check out this excellent article on how to fill out Form 5695. Oh, here are links to Form 5695 and its instructions.
Myth #3: The Solar Tax Credit is expiring this year.
As of the writing of this article (Oct 23, 2017), the truth is that the Solar Tax Credit does not expire until the end of the year 2021. The system must be put in service by this date in order for a homeowner to receive the Solar Tax Credit. In 2017 and 2018 and 2019, the Solar Tax Credit will be at its maximum rate of 30% of the costs. After 12/31/2019, the amount of the credit will reduce in size every year until it officially expires at the end of 2021.
Energy.gov put together this excellent schedule:
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
- There is no maximum credit for systems placed in service after 2008.
- Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2021.
- The home served by the system does not have to be the taxpayer’s principal residence.
Myth #4: The Solar Tax Credit applies to landlords who own rental property.
The truth is that you won't qualify for the credit unless you lived there. And even if you lived in this rental house for part of the year, you'll only get a portion of the tax credit based on the amount of time you lived in this rental house.
TurboTax summarizes the situation pretty well:
You can't claim a credit for installing solar power at rental properties you own. The exception is if you also live in the house for part of the year, and use it as a rental when you're away. You'll have to reduce the credit for a vacation home, rental or otherwise, to reflect the time you're not there. If you live there for three months a year, for instance, you can only claim 25 percent of the credit: If the system cost $10,000, the 30 percent credit would be $3,000, and you could claim a quarter of that, or $750.
Bonus Myth: Take this article as tax advice
The truth is we're not tax advisors or tax experts. Please be sure to verify this info with your tax advisor.
We're Verisolar, and we strongly feel our customers are entitled to the truth. This is what we understand to be true today to the best of our knowledge and research (read: Google-fu), and we will promptly revise this article if mistakes are found - or if the law happens to change.