The federal residential solar investment tax credit (ITC) is a 26% federal tax credit which can be used to reduce your income taxes when you’ve purchased a solar system outright and have it installed on your home.
How to qualify
Background on the Solar Investment Tax Credit
To qualify for this solar tax credit, the solar system must be at least 30 kilowatts in size. Also, the home itself must meet energy efficiency standards. If your home does not meet these standards, you cannot take advantage of the credit. Additionally, you cannot have already applied for another federal tax credit, such as the personal tax credit or the alternative energy credit, since this is the only tax credit that can be claimed on your tax return. Of course, to qualify for this credit, you must file a federal tax return.
This credit was originally designed to end in 2007. However, Congress has extended its expiration date through 2024. A home solar system installation can cost up to $30,000. The tax credit reduces the taxable income by $2,000 for each installation. Therefore, for every $30,000 of installation cost, a homeowner will reduce taxable income by $2,000. So the effective tax rate increases from 30% to 35% and the home value decreases by $10,000 for every year of the credit remaining. Therefore, in two years, the home is worth only $20,000 and the tax liability is only $6,000.
To qualify for this tax credit, a homeowner must have owned the home for more than two years and the home must be your residence. There is no home solar rebate available for this installation. If you have borrowed money to pay for the system, the monthly payment is not eligible for the tax credit. However, you can still qualify for the tax credit if you return the borrowed money before the end of the two year period. In this case the system is still your residence and the system is still eligible for the tax credit.
In order to reduce your income tax with the Solar Investment Tax Credit, you should carefully evaluate your tax situation before the end of the tax year to ensure you qualify for the tax credit. This makes planning your home solar system installation even more important. Since the solar tax credit has a shorter duration than the alternative renewable energy credits, it is important to consider alternative renewable energy options well in advance of the expiration of the tax credit. By planning early, you can maximize savings and minimize your tax liability.