Federal Solar Tax Credit Being Reduced after 2019
With the onset of this new year there is an important solar update that homeowners should be aware of. After 2019, the Federal Solar Tax Credit will be going down.
The Federal Solar Tax Credit (also known as the Investment Tax Credit or ITC) will go from 30% to 26% after 2019.
Disclaimer: This content is for informational purposes only. Please consult with a CPA or Tax Advisor before filing.
What is the Solar Tax Credit?
The Solar ITC is the 30% tax incentive on the gross cost of your solar system.
To claim the Tax Credit the requirements are:
- You must own the solar system. This means you purchase it outright with cash or finance it through your own solar loan. (A system acquired with a lease or PPA financing is not eligible for the tax credit.)
- You have income tax liability, which is what this incentive reduces.
Note, the credit does not need to be claimed in one year. For example, if your 30% tax credit is $6,000 total, and you only have $5,000 in personal income taxes one year, you can rollover the remaining $1,000 to next year’s income taxes.
This incentive has been a significant factor for home and business owners since 2005 as part of the Energy Policy Act. The incentive expiration date has been extended twice by the federal government. In 2016 the extension added a “step down” schedule that gradually phases out the credit over the next few years.
Solar Tax Credit Step Down Schedule
2019 is the last year for the full 30% credit! Beginning in 2020, the credit will drop to 26%.
Here’s the full solar Investment Tax Credit step down schedule:
Here’s a table of the ITC step down:
|Solar Tax Credit
Step Down Schedule
* Beginning in 2022, the residential portion of the Solar Tax Credit will be eliminated entirely. A 10% tax credit will remain for commercial and industrial projects only.
What happens when the Solar Tax Credit steps down?
While no one can be certain, we foresee a few possible outcomes:
- States take charge
- As additional states, like California, launch 100% Renewable Portfolio Standard (RPS) targets, there may be solar incentives available for homeowners residing in those states.
- These tax incentives would ideally meet or exceed the federal tax credit as it disappears. This is speculative and hopeful at best.
- Congress adjusts the step down
- While the incentives have been extended in the past, the government may decide to adjust the future schedule. However, this is dependent on politics.
- With the most recent extension, the fact that legislators built in a step down schedule seems to make it less likely to be extended at the 30% level.
- With the residential incentive going away entirely in 2022, Congress could consider including homeowners in the 10% floor that commercial will have, but that’s purely speculative.
Is there a way to make sure I can claim highest possible the Solar Tax Credit?
To be on the safe side, your solar project should be fully installed and paid for in 2019. This makes it certain that you can claim the tax credit on 2019 taxes.
But don’t put it off. It doesn’t seem like an issue in early January 2019, but the urgency will increase as year goes on — and solar installers will become very busy.
The planning for a solar project may take weeks to complete after the contract is signed. Permitting, financing approval, utility approval are all factors that can slow the speed of an installation. Once all of those bridges are crossed, the actual physical installation takes just a day or two. Read more about the solar installation process here.
So, to be safe that you will be able to claim 100% the 30% ITC, begin your research and process as early as you can.
As 2019 draws to a close and as word begins to spread about the reduction in the incentive, solar installers will get busier and busier, meaning your installation may be scheduled farther out than normal.
Is it a big difference between a 26% tax credit versus a 30% tax credit?
The Investment Tax Credit is applied to your solar system’s gross cost. The amount you pay will determine what you receive. Bigger system, bigger credit.
An example of the difference in credits in 2019 and 2020 for a $27,000 9 kW solar array:
|Tax credit difference in 2019 versus 2020 for 9 kW solar project|
|Year||Gross Solar Cost||Credit %||Credit Amount||Net Solar Cost|
That’s a savings difference of $1,080 compared to the previous year.
While ~$1,000 may not seem like a huge difference to some, if solar is in your plans, you should move forward this year to maximize your savings.
How do I claim the tax credit?
To claim the tax credit for your project, complete IRS Form 5695 – Residential Energy Credits when you are filing your Income Taxes.
If you are considering solar, here are some final notes
- The Solar Investment Tax Credit is the single largest incentive for solar installation. Maximize your savings by completing your project in 2019.
- Start your planning early to ensure that you will not be affected by a rush that may occur toward the end of 2019.
- Try our solar calculator for an instant snapshot of your savings with solar.
If adding solar to your home is in your 2019 future, we’re happy to help.