Federal Solar Investment Tax Credit, 2020

Going solar is great for the environment and even better for your electric bill. But did you know that going solar can greatly reduce the amount you owe the IRS in federal income taxes? 

If you live in the Southwest, then you’ve probably seen tons of solar being installed on residential or commercial property. Obviously, solar makes sense for a lot of people but you might be thinkings, “I know there are environmental benefits to solar, but can I afford it and will it save me money?” While the cost of solar has dropped over the years, there is a lot of financial support through local, state, and federal tax incentives. If you are a taxpayer and home owner, installing solar could be a great way to save you money!

State Solar Tax Credits

Arizona Solar Tax Credits

If you live in Arizona, you know that we have a lot of sun here. It makes sense that we would have some of the best solar incentives in the US! Established in 1995, the Arizona Residential Solar Panel Tax Credit is worth 25 percent of the cost of your solar panels (capped at $1,000). The solar panel tax credit can be used against your AZ personal income tax in the year you go solar, or it can be carried over for the next 5 years. To claim the state solar tax credit you must own your solar array. Residents who enter into a lease/PPA do not qualify because their system is owned by the leasing company.

California Solar Tax Credits

California was one of the first and most aggressive adopters of solar. Several years ago, when solar was much more expensive the State of California offered some impressive state tax credits. Over the years, the price of solar has dropped dramatically. Meanwhile California faded out the state tax credit. While the Federal Solar Tax Credit is still strong, there is no longer a California solar tax credit available. However, California still has some of the most expensive electric bills in the country. So while there is no state tax credit, homeowners in California still have the best ROI in the country because the utility companies pay more for solar energy than other states.

Federal Solar Tax Credits

The Federal Solar Tax Credit, also known as the Solar Investment Tax Credit (ITC) is the most advantageous solar incentive available to American taxpayers. Currently, the ITC is sunsetting and is only scheduled to apply to installations completed by the end of 2021. With the solar tax credit going away in 2021, solar is expected to have a record-breaking year. Which means installation calendars for respectable solar companies are going to fill up quickly.

How does the Federal Solar Tax Credit work?

Solar is already an impressive investment, but when you consider your savings with the IRS, solar tax credits make this investment a no-brainer. If you own your solar array, the dollar-for-dollar solar panel tax credit is applied to your federal income taxes and can reduce, or even eliminate, what you owe to the IRS. The solar tax credit applies to both residential and commercial systems, and there is no cap on the amount you can claim. It is important to note that the solar panel tax credit is NOT a solar panel rebate, but rather a dollar-for-dollar solar tax credit that you can use against your federal income tax. Even if you don’t have the tax liability to claim the entire solar tax credit in one year, you can “roll over” the remaining credits into future years for as long as the IRS solar tax credit is still in effect. This means that you can take advantage of all the reasons to go solar this year (Increasing utility rates, NEM rates) and you can still realize the full value of the Solar Tax Credit 2020 has to offer.

However, remember that if you sign into a lease or PPA with a solar panel installer, you are not the owner of the system. Thus you cannot receive the solar investment tax credit. For this reason it makes much more sense to purchase your system if you’re paying taxes. Not only do you qualify for the solar tax credit, it will add value to your home as well. It’s also typically just as cost-competitive to finance your system.

The Federal Solar Tax Credit Beyond 2020

Originally established in 2005, the solar tax credit was created to stimulate private and corporate investment in renewable energy and drive down the costs associated with this essential technology. After a 10 year period of large-scale success where the solar panel rebate was renewed multiple times, the average Price Per Watt (PPW) for a solar installation has dropped by over 60%!

In fact, the cost of solar has fallen so much that it is now cost-competitive when compared to developing new power plants that use fossil fuels. With a price reduction of this magnitude it is undeniable that the Solar Investment Tax Credit has done its job. However, while solar is expected to continue to grow, the Federal Solar Tax Credit is not up for renewal after its scheduled phase-out ending in 2022. In other words, this is the best time to buy solar, while you can still take advantage of government solar incentives.

A breakdown of the solar tax credit phase out:

How ITC Tax Credit Works 2016-2020

Solar Tax Credit

0 %

Solar Tax Credit

0 %

Solar Tax Credit

0 %

2022 & AFTER
Solar Tax Credit

0 %
0 %

How do I claim the solar investment tax credit?

Once you’ve invested in your solar system, you’ll need to prove it to the government to claim your Federal solar tax credit. For that, you need IRS Form 5695 to claim the federal solar tax credit in 2020.

If you file your own taxes, use the steps below to claim your Solar Tax Credit:

  • Keep all of your installation expense receipts in a safe place.

  • Confirm you are eligible for the IRS solar tax credit. (As long as you didn’t lease the system, you’re likely eligible. Check with a tax specialist if you’re not sure.)

  • Complete IRS Form 5695 to add up your renewable energy credits.

  • Add your renewable energy credit information to your 1040 individual tax return.

We hope this serves as a good introduction to the Federal Solar Tax Credit and helps you during the research process. If you need help from a solar designer, get in touch with us for a consultation. We’re happy to walk you through any questions you may have. 

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