How does the solar tax credit work?
How Much Can You Deduct?
The Solar Credit provides a 30% benefit on taxes for the purchase & installation of a solar system. This includes the total cost, meaning system cost, installation, associated electrical work, required roofing modifications, etc.
Remember, credits are a dollar-for-dollar reduction in taxes.
- The credit only applies to those who own the system (leases cannot claim the credit)
- Credit only covers any federal tax you owe. For example, if you install a $30,000 solar system, you'd be looking at a $9,000 tax credit from the IRS. However, if your total tax liability is only $7,500 for the year, you would have to rollover the $1,500 difference ($9,000 - $7,500) to the following year.
- NOTE: Withholdings have no impact on credit usability. As such, federal tax liability as written above refers to total tax, not the refund/amount owed as result of your filed tax return.
- For example, if you have the tax liability of $10,000 as mentioned above, and have only $8,000 withheld, you'd still get the full credit of $9,000 regardless of withholdings. That's because your total tax exceeded the $9,000...even though your tax return would result in you owing $2,000 due to having short withholdings (you're not limited to a $2,000 credit just because that's what your tax return says you owe for taxes). In other words, you don't need to owe $9,000 as a result of your tax return to get the full credit, you just need to have a total tax that exceeds $9,000 in the solar purchase year to get the full credit.
Ways to Avoid Losing The Credit
- Consider an IRA conversion (Traditional to Roth) to increase taxable income and corresponding tax (recommended if total tax is less than credit amount). This will give you full credit, plus move future distributions from being taxable to non-taxable.
- Consider bunching itemized deductions in the tax year before and tax year after your vehicle purchase year.
- Above are only advised if you won’t get max credit. Check with us first.
How Do You Get the Credit?
- At tax prep time, provide us with your purchase paperwork and corresponding credit info.
The Credit Is Decreasing
For years, the credit has been 30% of the total system cost.
However, in 2016, the IRS introduced a step-down to the credit, meaning the percentage will begin to decrease starting with the 2020 tax year. See below for the future credit schedule.
2022: 10% (commercial solar only)