The Solar Investment Tax Credit: What You Need To Know
The most important solar policy of the 21st century, which has helped drive the solar industry boom and has enabled dramatic savings to consumers, is scheduled to expire next year. Unless Congress extends it, the residential component of the Solar Investment Tax Credit (ITC), which provides a 30% federal tax credit to home solar buyers, will expire on January 1, 2017.
In his proposed 2016 budget in February, President Obama made a move to extend the solar ITC permanently. However, Congress is unlikely to approve this budget as is. Rhone Resch, president of the Solar Energy Industries Association (SEIA), is pushing hard for an extension. “Oil and gas has had incentives since 1916, coal since the 1930s, and nuclear since the 1950s,” he said at the PV America 2015 conference earlier this month. “They aren’t ramping down, so why should we?”
Although Congress has given the Solar Investment Tax Credit new life twice since its passage in 2006, it’s impossible to say what will happen this time around. Given that many of the big state incentives have come to the end of their life (the California Solar Initiative is no longer taking new applications), the ITC may be the last big solar subsidy for most California homeowners.
If you have ever considered or are currently considering a move to solar, if you don't act soon, you are liable to miss out on sizeable savings. Under the current deadline, systems must be installed and running by December 31, 2016, to be eligible for the credit.
What Is the Solar Investment Tax Credit?
The Solar Investment Tax Credit is a dollar-for-dollar reduction in federal income tax for home solar buyers. 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 bill by a small amount). It’s money that you don’t have to pay the IRS, or that the IRS will refund to you in April if you’ve overpaid.
Who Can Get It?
Any U.S. taxpayer who purchases a solar system outright is eligible for the ITC. No matter how you buy your system — with cash, loan, line of credit, or even that mint-condition Tony Gwynn rookie card — you can take the tax credit.
If you installed your system with a solar lease or Power Purchase Agreement, then you are not eligible, since the leasing company actually owns the system.
Remember, this is a tax credit, not a rebate, so you must have a tax liability to benefit. If somehow you don’t pay income tax (I won’t ask), then you won’t be able to use the credit.
How Does It Work? How Much Will I Save?
The ITC for residential system owners is 30% of the net system cost. You are permitted to combine it with other financing plans.
Let’s say you purchase a system in 2015 for $25,000. Take the net cost, which is the price you paid less any other credits*, and multiply that by 30%.
$25,000 x 0.30 = $7500
(*Some states, municipalities, and utilities have their own rebates or credits, and the IRS won’t let you double dip, so you must subtract those credits from your total to come up with the net cost. People in Baker Electric Home Energy’s service area are not currently eligible for any credits other than the ITC.)
Next, complete an IRS form 5695, file it with your 2015 tax return, and take $7500 off your tax bill. If you don’t owe the IRS that much, carry the excess over to your 2016 return. (It’s a one-time credit, but you may carry it forward up to five years.)
How to Begin Saving Sooner
Your solar tax credit is really like a prepayment to the IRS. So if you don’t want to wait until tax time to see your savings, you can decrease your withholding or your quarterly estimated tax payment as soon as your array is running. That’s more cash in your pocket today, and another reason not to wait to buy your new system.
(Note: Please always consult with your tax advisor about how tax incentives will work for you before you take action. The tax code is a complex animal.)
Why Is the ITC Important?
Since it was implemented in 2006, the ITC has helped spur the renewable energy industry boom, driving competition and innovation and reducing costs and carbon emissions — a win-win for consumers and the environment.
According to SEIA, from 2010 to 2014, the average price of a residential PV installation dropped 45% and the average price of a PV panel 63%. “The solar industry employs nearly 175,000 Americans, pumps $15 billion a year into our economy and offsets more than 20 million metric tons of damaging carbon emissions into the air. This remarkable progress is due, in large part, to smart, effective public policies like the solar ITC,” said SEIA’s Resch.
What’s the Catch?
There is none. And other than the usual impenetrability of the IRS form (which providers like Baker Electric Home Energy will help you with), it’s quite painless.
The only sad part of this story is that for residential solar, it all goes away December 31, 2016, so make sure your system is online by then or you’ll miss out.
Find out how much the ITC can help you save on your new system. Contact Baker Electric Home Energy.
How to Fill Out IRS Form 5695?
You can get the form through the IRS’s website or through your local tax office. The form must be is submitted with the personal income tax 1040 return of the homeowner claiming the tax credits.
Speak Out for Smart Solar Policy, and Savings
If, like me, you think letting this important policy come to an abrupt end is a dreadful idea, then please contact your representatives and tell them so. Extending the credit has clear benefits for consumers, the solar industry, the economy and the environment.
Contact your congressional representatives!