The federal tax credit for solar energy systems
Published on 31 Oct, 2018 by Michael Bishop
Categories: Solar incentives
The cost of solar energy systems has plummeted over the last decade. When the author joined the solar industry in 2006, a 4kW system would typically cost over $30,000 before incentives. That is a lot of money! Now that same system will cost around half of that — even before incentives. A $15,000 price tag makes solar systems a great investment wherever rates are fairly high, i.e. over 12¢ per kilowatt hour.
But it gets better. Thanks to a 30% federal tax credit that’s currently available to homeowners, that $15,000 solar system will really only cost $10,500. The tax credit has a $4,500 value. This can make solar energy an outrageously great investment.
Here are some common questions about the solar federal tax credit:
How long will the federal tax credit last?
If you go solar by the end of this year, 2019, you'll get the full 30% tax credit. It ramps down from there: it's 26% in year 2020, and 22% in year 2021. After that, it's gone.
What if we don't have that much tax liability?
No worries. You can claim as much of the tax credit as you can. Any unclaimed balance can be carried forward to the next year. So if your tax credit value is $4,500, and you only claim $3,000 of it in the year of your solar installation, you can carry the remaining $1,500 forward to the next tax year.
What if we might never have that much tax liability?
For example, what if you're retired and pay no, or very little, federal tax? You might want to consider leasing the solar system instead of buying it. With a solar lease, the leasing company owns the system they install on your roof, and you pay a monthly amount to "rent" it.
The lease payment should be lower than otherwise because the leasing company gets the federal tax credit. A local installer should be able to show you this option and the solar-purchase option side by side, and help you decide which makes better financial sense in your particular situation.
Can I get the tax credit if my employer takes my taxes out of my paycheck?
Yup. Those are just tax estimates, paid in advance. The moment of truth is when you send in your tax return. If the IRS owes you money because of the solar tax credit, they’ll refund you!
Does the federal tax credit also cover batteries?
Yes, but here's the catch: In order to claim the 30% tax credit on a Tesla Powerwall or other home battery system, the battery would need to be charged 100% by your solar energy system. That means no energy from the electric grid can charge your batteries. Fortunately, you can make this automatic and forget about it — your installer can set it up in the software that manages your battery.
Note that, thanks to “net energy metering,” you can just get solar panels without a battery — the energy grid works like your own 100% efficient battery!
However, if you're looking for backup power, then H=home battery systems are a good option. In some cases they also increase the financial value of your solar system. You can learn more here.
I get a tax deduction for a home office. How does that work with the solar tax credit?
If your home office is 20% of your home's square footage (for example), then the IRS would consider 20% of your solar energy system to be a business investment. Fortunately, there's a separate 30% tax credit for business. So you'd be including two forms instead of one with your tax return, but you'd still get the same overall tax credit.
Once I get solar panels, how do I claim the federal tax credit?
Check out the How do I claim the solar tax credit? section in this article for a detailed explanation.
The solar federal tax credit is an important tool in our shared effort to reduce carbon emissions, create local jobs, and improve our energy security. It also makes solar energy an even better way to cut your energy bill and reduce your home's carbon footprint.
This information in this article is our best understanding of solar tax-credit issues, but we aren't tax professionals. We encourage you to confirm with a tax professional before undertaking any major financial decisions.