A Handy Little Federal Solar Tax Credit Guide
Here at Atlantic Key Energy, we know how important solar power is. One of the best things about it is that it reduces your electric bill. Next, it increases the value of your home and protects the environment. But interestingly enough, solar power can help you lower your taxes. How? Federal solar tax credit.
Tell Me More About the Federal Solar Tax Credit, Please
The federal solar tax credit also goes under the name of investment tax credit, or ITC. When you install a solar energy system, the ITC helps you deduct 26% of its cost from your federal taxes. And by ‘cost’ we mean the total cost of the energy system, from equipment to installation. The credit applies equally to commercial and residential solar energy systems. In addition, there is no cap set on its value.
How Much Will I Save Using this Tax Credit?
At the moment, you can deduct 26% of the total cost. However, you actually have to own the system you’re claiming credit for. Let’s say that you want to lease a solar system. You still wouldn’t be eligible for the ITC because you’re not the owner. Instead, the company that leases the system to you would claim the credit incentives.
If you’re worried about investing tens of thousands of dollars in a solar energy system, keep in mind that it’s a renewable energy source. Your power bill will drop, and you’ll get your money back within a few years. When you couple that with the ITC, you’ve got yourself a winning combination.
Why Would the Government Award Credits for Solar Energy Systems?
It’s simple. The federal solar tax credit is an incentive to switch from nonrenewable energy sources to solar power.
But How Does It Work?
Tax credits reduce the income tax that a person owes. If you have a certain amount of money, you can claim a tax credit to reduce it. Naturally, this text won’t cover the in-depth details of how tax credits work. We would advise that you talk to your accountant and see if you’re eligible for a federal solar tax credit or not.
Isn’t That Just a Refund?
Well, no, it isn’t. If you want to claim the incentive on this tax credit, you actually have to owe taxes. Naturally, if you’re a legal citizen of the USA, you already pay taxes. So chances are that if you owe some money in taxes, you’re eligible for ITC.
How do I claim the Federal Tax Credit?
1. Keep Each Receipt
When claiming a credit on an expense, it’s always a smart idea to keep every piece of paper related to the expense. The same goes for solar energy systems. Every single receipt is important; it’s cast-iron proof that you actually gave money out of your pocket for the system. And the more you spend on the system, the bigger the credit you can claim. So which expenses does this entail? Let’s list them:
- Consultation fees
- Shipping costs
- Installer fees
- Electrician and engineer fees
- Tools used (both rented and bought)
- Hardware supplies (bolts, nuts, screws, wiring, and so on)
- Additional equipment (man-lifts, scaffolding, ladders, etc.; again, both bought and rented)
- Permit fees and service costs
You can also claim (or not claim) credit depending on how you choose to install the system. If you do it by yourself, you can’t claim your labor as an expense. However, you can save a lot of money by not hiring a contractor.
Of course, hiring a contractor has its benefits too. Not only will you get a professional to install your system, but you can also claim this action as an expense.
2. The Paperwork Part: Filing Form 5695 Using the 1040 Individual Tax Return
If you want to claim the federal solar tax credit, you’ll need a specific IRS form. In this case, that’s Form 5695.
These are the steps you’ll want to take to file this form. Of course, if you have a professional who files your taxes, feel free to skip this section.
- Get every single receipt related to the energy project.
- Put them all in a safe folder.
- Discuss whether you’re eligible for the ITC with a specialist.
- Fill in Form 5695; you can find step-by-step guides on filing tax forms on each individual form page of the official IRS website.
- Fill in Form 1040 with the information on your renewable energy credit.
So, How Long Will I Be Able to Claim This Credit For?
Naturally, the 26% federal solar tax credit won’t last forever. In time, the federal government will reduce the percentage and by 2022, the ITC will be gone.
It’s important to keep in mind that during the next three years, the credit won’t even retain the same value. In 2020, for example, it will drop down to 26%. A mere year later it will go down to 22%. But there is a silver lining to all of this. Namely, you’ll be able to get the credit within the same year that you finish installing the energy system. In other words, if you install it in, say, 2021, you won’t have to wait until 2022 to claim the incentives (and get duped). More importantly, however, you can still claim the massive 30% incentive by the end of 2019.
A Brief Conclusion
Solar energy is extremely important for our future. That’s why government tax incentives like the federal solar tax credit are a great thing. But if you’re interested in claiming the ITC, don’t rely on this article alone. Feel free to give Atlantic Key Energy a call. Not only will we offer you the best deals on solar energy systems, but we’ll provide consultations and answer any questions you might have. After all, solar energy is a huge investment and we all benefit if we approach it the right way.