Act Now To Take Advantage of the ITC This Year
September 20, 2016
Every year thousands of San Diego homeowners walk away from a financial windfall just because they procrastinate or weren’t aware of a remarkable—but not here forever—tax benefit. The 30% solar Investment Tax Credit (ITC) is one of the most important and rewarding federal government incentives available to homeowners today. The ITC, together with the energy cost savings resulting from a well-designed and installed solar system – could be big money in your pocket. Now that I have your attention, here are some basics.
What is the Investment Tax Credit?
The ITC is a dollar-for-dollar reduction in federal income tax for individuals who purchase and install a solar system for their home (businesses can qualify too). The amount credited is equal to 30% of the purchase price of your entire solar system. It’s not a rebate which helps you pay for your system directly. And it’s not a tax deduction which reduces your total income and thereby decreases your tax burden. It’s a credit against your tax liability — dollars you don’t pay the IRS. However, you do not receive a tax refund if the amount of the solar credit is larger than the amount of the taxes you owe. Note - your solar system must be installed and energized within the tax year to qualify. If you’re hoping to take the credit on this year’s taxes, buy now! Depending on where you live, installation can take as little as 30 or as much as 90 days.
It works like this: Let's say you purchase a system for $30,000. Take the net cost, which is the price you paid less any other credits or rebates, and multiply that by 30%. $30,000 x 0.30 = $9000. That $9000 is a pretty impressive reduction in the taxes you would otherwise owe.
Here's what you need to know if you wish to take advantage of the ITC on your 2016 taxes:
Who Can Take Advantage of the ITC?
Any homeowner who is a U.S. tax payer and purchases a solar system outright is eligible for the ITC. The homeowner may use cash, loan or line of credit. However, if you choose to fund your system using a solar lease or Power Purchase Agreement, you aren’t eligible. In this case, the tax credit belongs to the third-party owner of the system who uses it to lower your monthly payments.
And remember, this is a tax credit so you must have a tax liability to benefit. And you must owe taxes at least equal to the amount of tax credit you are claiming. But good news – if you don’t have enough tax liability in the current financial year, you can roll the remaining credit amount over to another year while the ITC is still applicable.
One other condition – you can only use the ITC on the solar system installed on your primary residence. Other homes you may own don’t qualify.
And as with any tax situation about which you need clarification, a call to your tax professional should be your first move.
How Does the ITC Work with Financing?
A critical decision when switching to solar is choosing how to best finance your system. The finest solar providers will offer a range of financing options. Once again, buying your system using cash, loan or line of credit is the way to take advantage of this generous tax credit. I recently talked to two solar financing firms, Dividend Solar and San Diego Metropolitan Credit Union about loans. Each strongly encourages its customers to save even more money by using the ITC to bring down their monthly loan payments.
According to Henry Bowling from Dividend Solar, reinvesting your tax credit into your solar system loan provides solar buyers with “extra savings in addition to what they would see from their utility.”
Marshall Tanneberger, VP of Lending at San Diego Metropolitan Credit Union explained that putting your ITC back into your loan allows you to “lower your payment, significantly affecting your bottom line because it’s based on a much smaller principle balance.”
The ITC Going Forward
The Investment Tax Credit was set to expire at the end of 2016, but fortunately, Congress voted to extend it to December of 2023. The extension is expected to nearly quadruple solar installations by the end of 2020 while doubling U.S. solar employment and stimulating $140 billion in economic activity.
Here’s what you need to know. Homeowners will benefit from the 30% rate until 2019. In 2020, it will fall to 26% and then down to 22% in 2021. After that, it will remain at 10% for businesses and organizations but drop to 0% for homeowners.
What Do You Need To Do In Order To Qualify For The ITC?
As stated above, since the tax credit is a reduction in federal income tax for home solar buyers, you need to have enough tax liability to qualify. You also need to have purchased your solar system. Talk with your tax professional if you’re unsure whether or not you qualify.
IRS Form 5695 is the form used to apply for federal tax credits for residential energy saving measures, like the Solar Investment Tax Credit. You can take the credits if you made energy saving improvements to your home, such as installing a solar power system, solar water heating system, geothermal pump, etc.
You can get the form through the IRS’s website or through your local tax office. The form must be submitted with the personal income tax 1040 return of the homeowner claiming the tax credits.
If you wish to take advantage of the Investment Tax Credit in the current year, then don’t hesitate to contact us today!
Please contact your accountant if you have any specific questions regarding claiming your Solar Investment Tax Credit.