The United States government really wants you to go solar. And it wants you to do so affordably.
This is why it launched a very generous solar incentive that allows you to claim a 30% tax credit after installing your photovoltaic (PV) system.
But how does the federal solar tax credit work? And is it really that big a deal?
How the Federal Solar Tax Credit Works
The federal solar tax credit (a.k.a. the solar investment tax credit) differs from an ordinary tax deduction. With the latter, you “deduct” certain expenses from your gross income, thus, lowering your overall liability. If your income is $100, for example, and you buy a deductible item for $10, your taxable income is now $90.
But a tax credit is much better. You can use it to pay off whatever federal taxes you owe. Think of it as a gift card from Uncle Sam.
Who Is Eligible for the Federal Solar Tax Credit?
This solar incentive is available for residential and commercial customers alike:
- For Homeowners: Calculate the net cost of your solar installation (minus any other incentives). And multiply that new dollar amount by 30%. This is your tax credit.
- For Businesses: Calculate the gross cost of your solar installation (before any other incentives). And multiply that dollar amount by 30%. This is your tax credit.
What Are the Benefits of the Solar Investment Tax Credit?
The benefits are pretty straightforward. When used with other solar incentives (i.e. rebates, net metering, feed-in tariffs), the federal solar tax credit can reduce the total cost of your solar PV installation—sometimes by as much as 50%. Cost reductions like these can cut your payback period in half and significantly boost the ROI of your solar investment.
You are essentially receiving free money from the government—free money that will help reduce your monthly utility bills for decades to come.
What If I Don’t Have Any Tax Liability This Year?
What happens if you go solar today, but you don’t owe any money to Uncle Sam?
No problem. The solar investment tax credit can be used at any time within the first 5 years of installing your system. So if you have no taxable income this year, you can save it for later.
Are There Any Drawbacks of the Tax Credit?
Actually, there is one drawback of the program. Like most other solar incentives, the federal tax credit won’t be around forever. In December of 2015, the federal tax credit was extended and will remain at the 30% level until the end of 2019, but it will then ramp down incrementally through 2021. After 2023, the residential credit will drop to 0% while the commercial credit will drop to a permanent 10%.
This is why it’s important to act now. Why pay full price for your solar installation when the federal government is giving away free money?
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