How Do Solar Energy Tax Credits Work?

Solar energy is one of the most fast-expanding and cost-effective sources of electricity, and it will continue to develop significantly in the future years. Solar energy is an endlessly renewable energy source from the sun’s electromagnetic radiation. The economic benefits of solar are also increasing as solar panel technology improves. It produces electricity and heat in a completely sustainable and cost-free manner. Additionally, solar energy can be captured and used in various ways, including generating electrical or thermal energy for homes, businesses, utilities, and other purposes. Going solar is a terrific way for many households to save money on their monthly energy costs and reduce reliance on their utility company. Yet, the federal tax credit for solar energy makes this a more appealing investment. 

What is Solar Energy Tax Credit?

The Solar Energy Tax Credit, also known as the Federal Investment Tax Credit, allows you to deduct up to 26% of the cost of your solar energy system from your federal taxes. The tax credit is intended to encourage more homes to install solar, boost investment in the solar industry, and accelerate the pace of solar investment and innovation by helping to cover the cost of installing residential solar. This Solar Energy Tax Credit was extremely popular since it helped create hundreds of thousands of employment, put billions of dollars into the US economy, and was a key step toward reducing greenhouse gas emissions.

How Does Solar Energy Tax Credit Work?

You may now know the solar tax credit, but do you know how it works?

As a homeowner, you can deduct 26% of the cost of your solar energy system from your business taxes, thanks to the solar energy tax credit. This is a dollar-for-dollar credit against federal income taxes due. You can claim a solar energy tax credit for your money on solar panels, reducing the amount you owe when you file your annual federal tax return. Using Tax Form 5695, you can claim the Solar Energy Tax Credit once for the tax year you install your system. The credit is then applied to your federal tax due, dollar for dollar, so if you have 1,000 credits, you will owe $1,000 less in taxes. Include your renewable energy credit information on a standard Form 1040 when filing your taxes once you’ve calculated how many credits you’ve gotten.

It’s important to differentiate between a tax credit and a tax refund. To be eligible for a tax credit, you must owe the government money for the credit to offset some or all of your debt. If those tax dollars have already been withdrawn from your paycheck, you may be eligible for a refund, but you will only get the money you have already paid. If you don’t owe any taxes, you won’t be eligible for a tax credit because you didn’t owe any amount of money in the first place.

Finally, the federal income tax credit for solar panels can be applied to either the federal income tax or the alternative minimum tax, so you may be qualified to claim the value of the credit for solar panels regardless of how you calculate your taxes.

How To Qualify for the Solar Energy Tax Credit?

You must owe enough money to the federal government for the Solar Energy Tax Credit to offset your tax payment. A tax liability must exist at the time of filing to be eligible for the tax credit. To put it another way, if a homeowner receives money back from their tax return, the credit will not be applied for that year and will roll over to the following year. For example, if you were qualified for a $6,000 tax credit but only owed $4,000 that year, your tax payment would be fully eliminated that year, and you would be entitled to deduct an additional $2,000 from your tax payment the next year.

Also, multiplying 26% by the tax basis, or the amount invested in qualified property yields the amount deducted. Solar panels, installation fees, racking, circuit breakers, energy storage devices, equipment sales, and use tax are all eligible properties for solar systems. Moreover, even if the solar energy system is not on your primary property, you can claim the solar tax credit. You can still claim a portion of the credit on your taxes to lower the amount you owe if you own the property and live in it for part of the year. However, you cannot claim the solar energy tax credit if you install solar on a home solely for investment purposes, such as the one you rent out full-time.

Takeaway

There’s never been a better moment to get started than now if you’ve ever considered going solar and wondered how to earn your solar energy tax credit. With the Solar Energy Tax Credit, you may earn money back on your solar energy system and ensure you get the best return on your investment while the solar tax credit is still available. Overall, by investing in solar, you will be helping to create jobs and build the economy while also saving money. Allow your business to continue driving down costs and investing in their growth by visiting our website!