What is the Federal Tax Credit for Solar?

Setting the Stage: ITCs and Solar System Costs

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In order to properly explain the Federal Solar ITC, we should identify exactly what an ITC is in the first place and how a solar system’s cost plays a pivotal role in the solar tax credit.

An Investment Tax Credit (ITC) is credit against the tax you owe for a given year because you invested in a commodity or asset that the IRS decides is worth giving a tax break for. Thanks to the federal government, the IRS currently (at the time of this article’s publishing) identifies a solar panel system, both for residential and commercial purposes, as an asset that qualifies for an ITC. This means that when a homeowner or business acquires one, their tax withholdings will come from the credit first instead of their bank account. Usually, an ITC is equal to a portion of the total cost of the investment; in the case of qualifying solar panel systems, the current amount at the time of this article’s publishing is 30% of the system’s total cost.

Let’s make one thing clear: when compared to the expense of paying for electricity through the utility grid, solar panel systems are almost always more cost-effective. Thanks to the ITC and other local incentives, homeowners can have a system installed for no money out-of-pocket and their expenditure for electricity drops, not increases. Despite this fact, there is a non-zero cost for the system and its installation; this number can be easily found in any installation agreements related to the system and is the number the IRS uses to calculate the value of your ITC when you go solar.

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How the ITC Works Depending on Your Tax Situation

Everyone pays their taxes differently; no matter how you do it, you have to do it if you don’t want the IRS banging on your door. While we can put simply the basics for how the ITC works for the average person, it is important to note that Spartan Solar does not consider the following explanations a form of tax advice, and you should always consult your tax advisor for clarity on how going solar will impact your tax situation in particular.

That being said, at tax time, the average American either files a W-2 for wages and income or a 1099. For both, the solar ITC directly applies, just in different ways.

The ITC for W-2 employees or any others whose tax is automatically withheld:

If you are a W-2 worker and receive your paycheck after taxes have been withheld, then the IRS is actively taxing you on every paycheck you make. They do this by guessing how much you will be liable to pay in taxes that year (by assuming what your income will be), and at the end of the year when you file taxes, they give you a refund if they overestimated your tax liability or a bill if they underestimated it. When you go solar, the ITC works to put the amount that is 30% of the system’s cost against that estimation. To illustrate this, we will use an example:

(all values are completely made-up to make the math easy)

• Homeowner A is single and makes $52,000 a year. His weekly paycheck before taxes is $1,000.
• After taxes, Homeowner A takes home a paycheck of $750. This means that every week the IRS takes $250 to put towards taxes, or $13,000 in taxes for the year, because they estimate that’s how much he’ll owe.
• Homeowner A gets a solar system put on his home that has a total cost of $30,000. 30% of that system cost is $9,000. Despite being “expensive”, he paid $0 to have it installed and now pays $50 less per month on electricity!
• At the end of the year, the IRS realizes they took way more money from Homeowner A than they should have, because $9,000 of it came from the solar system he got. This means that Homeowner A only owed $4,000 from his paychecks, not $13,000.
• Homeowner A receives a $9,000 refund from the IRS after he files his taxes in the form of a direct deposit to his bank account!

The ITC for 1099 self-employed or independent contractors:

If you file a 1099 form of some kind at tax time, you do not have to deal with taxes being withheld from every paycheck; instead, you have to send the IRS big chunks of money, usually either quarterly or in one big shot at the end of the year. Ouch.

Instead of estimating for you, the IRS waits for you to do the estimations for them, and then when you file, they’ll check to see if you messed up. If you want less headache in your life, don’t mess up that guess. If this is how you do taxes, the solar ITC will work something like this:

(again, made up so it’s easy)

• Homeowner A makes $52,000 as an independent contractor through 1099 pay. His pay is irregular, and he does not pay taxes from his paychecks.
• Homeowner A estimates he will owe 25% after all deductions, meaning the IRS will want $13,000 from him.
• Homeowner A plans to submit $13,000 to the IRS, but then remembers he got a solar system installed with a total cost of $30,000, meaning he has a $9,000 credit to add.
• Instead of sending the IRS $13,000, Homeowner A only sends $4,000. The rest of the $9,000 stays in his bank account and both he and the IRS are very happy at tax time!

It is important to note that if you are not liable to pay taxes on your income, you will not be able to receive the benefit of the solar ITC when you go solar. Always double-check with your tax professional to ensure the ITC applies to your tax situation. Additionally, in order to claim the federal solar ITC, you must own the solar panel system on your home.