What You Need to Know About ITC

The Federal Government Will Pay You to Switch to Solar. Really.

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 percent 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 ITC Exactly?
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 percent 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.

The Investment Tax Credit is a 30 percent dollar-for-dollar reduction in federal income tax for anyone who purchases solar panels for their home or business.

 

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 percent. $30,000 x 0.30 = $9,000. That $9,000 is a pretty impressive reduction in the taxes you would otherwise owe.

Can I Take Advantage of the ITC?
Any homeowner who is a U.S. taxpayer 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.

Any homeowner who is a U.S. taxpayer and purchases a solar system outright is eligible for the ITC.

 

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 only can 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 ITC Work With Solar 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 percent rate until 2019. In 2020, it will fall to 26 percent and then down to 22 percent in 2021. After 2023, the credit will drop down to 0 percent for homeowners and will remain at 10 percent for businesses and organizations.

Homeowners will benefit from the 30 percent rate until 2019.

 

What Else Do I Need to Know?
I’ve explained the basics but there are great resources clarifying even more about the ITC online. Check the Solar Industries Association® (SEIA) fact sheet at www.seia.org/policy/ finance-tax/solar-investment-tax-credit.

The government is a big fan of renewable energy. But the ITC as a motivation to homeowners won’t last. Is this the year you take advantage of this great incentive? Don’t miss out.