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Solar Tax Credits 101

The federal tax credit for solar energy is generous. The credit for 30% of the installed cost runs through the end of 2019, in 2020 it decreases to 26%, and in 2021 it decreases again to 22% before ending completely in 2022. Of course there are a couple of caveats. The first is that utility incentives must be accounted for when calculating the credit. If a utility rebate, for example, is considered taxable income the full tax credit may be taken while the rebate will increase the amount you pay taxes on. If, on the other hand, the utility rebate is not considered taxable income, that amount must be deducted from your installed cost before the tax credit can be applied. Check with your local utility (and tax advisor) for guidance on how to treat any incentives.

Second and perhaps more importantly, households may or may not have enough tax liability in a given year to take full advantage of the tax credit. Fortunately, those of us with relatively stable tax situations can easily determine our liability history as a predictor of future liability. Your total tax liability is found on line 63 of your federal income tax return and is called total tax. If your total tax tends to be equal to or greater than the value of your tax credit, you can plan to be able to take the full credit in one year. If it’s lesser, you will likely have to take the credit over multiple years. The common refrain about carrying forward unused tax solar credits is that you can carry them forward until the tax credit expires in 2022.

Let’s look at a couple of different scenarios:

Scenario 1

You install a 4 kilowatt solar PV array for a total cost of $12,000. Your utility doesn’t offer an incentive. Looking at line 63 of your last three years of tax returns, you average $4,000 in total tax liability. In this case, because your tax liability exceeds the 30% federal tax credit, you can plan to take the full credit in Year 1.

$12,000total installed cost
$0utility rebate
$12,000net installed cost
$3,600potential 30% tax credit
$4,000average tax liability
$3,600estimated tax credit Year 1

Scenario 2

You install a 4 kilowatt solar PV array for a total cost of $12,000. Your utility offers you a rebate of $2,000, which it says is not considered taxable income. Looking at line 63 of your last three years of tax returns, you average $2,000 in total tax liability. In this case, you will have to spread out the tax liability between two years.

$12,000total installed cost
$2,000utility rebate
$10,000net installed cost
$3,000potential 30% tax credit
$2,000average tax liability
$2,000estimated tax credit Year 1
$1,000estimated tax credit Year 2

In summary, if the federal tax credit plays a big part in your decision-making about whether to go solar, do your homework before making an investment. If you are a retiree or live on an income in which your tax liability is very limited, you may not be able to take advantage of the credit at all. If your tax situation varies widely from year to year, consider making your investment in a year in which you think you’ll have enough liability to take the full credit. If your tax liability is relatively low and you think you’ll need to carry it forward to get the full value, consider investing sooner rather than later as you may not be able to claim the credit after it expires on December 31, 2021. And most importantly, don’t take our word for it – when it comes to taxes, professional tax advisers can help you understand the tax credit (and what it means for you) best.

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