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All You Need to Know About Solar Panel Federal Tax Credit in the USA | Solar Panels Tax Credits

All You Need to Know About Solar Federal Tax Credit in the USA

Solar Federal Tax Credit

Going solar is one of the best things you can do when you want to save money on your electricity bills while saving the environment at the same time. Solar panels have come down in price significantly in recent years, making them more affordable than ever before.

 

And, in addition to saving you money on your energy bills, solar panels can also help you save money on your taxes. This article will show you everything you need to know about solar federal tax credits in the USA.

USA Federal Solar Tax Credits

The federal government offers a solar tax credit that allows you to deduct 26% of the cost of your solar panel system from your federal taxes. This tax credit is available for both residential and commercial solar installation, and there is no limit on the amount that you can claim.


The solar tax credit was created as part of the Energy Policy Act of 2005 and it has been extended several times since then. Originally, the solar tax credit was set to expire at the end of 2007. However, it was extended through the end of 2016. And, in December 2015, Congress voted to extend the solar state tax credit once again, this time through the end of 2021.

How Solar Tax Credit Work

The solar tax credit can be used to offset the cost of both purchasing and installing a solar panel system. This includes the cost of the panels themselves, as well as any associated costs such as installation and permits.

 

You can claim the solar tax credit when you file your federal taxes for the year in which you installed your solar panel system. For example, if you installed a solar panel system in 2020, you would claim the solar tax credit on your 2020 taxes.

 

It's important to note that you can only claim the solar tax credit if you own your solar panel system. If you lease your solar panel system, the leasing company is the one that gets to claim the solar tax credit.

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Incentives of Solar Panel Federal Tax Credit

Incentives of Solar Panel Federal Tax Credit

The incentives you can get by solar panel are amazing. As we know, the solar panel is very useful to produce electricity without using any polluting fossil fuels, and it also helps you save a lot of money on your electricity bills. But in addition to that, it also helps you get a great return on your investment through the federal tax credit state.

 

The average cost of a solar panel system in the USA is around $10,000. With the solar tax credit, you can deduct 26% of that cost from your taxes, which comes out to a $2,600 tax deduction.

 

This means that if you have a marginal tax rate of 25%, you would effectively be getting a 26% return on your federal solar investment in the form of lower taxes. And, if you have a marginal tax rate of 15%, you would be getting a 36% return on your investment tax credit.

 

There are very few solar investment tax that offer such a high return, which is one of the reasons why solar panel systems have become so popular in recent years.

How to Claim the Solar Tax Credit

Claiming the solar tax credit is relatively simple. When you file your taxes for the year in which you installed your solar panel system, you will need to fill out Form 5695 and attach it to your federal tax return.


Form 5695 includes instructions on how to calculate the amount of the solar tax credit that you are eligible for.


It's important to note that you can only claim the solar energy credit tax if you owe federal taxes. If you don't owe any federal taxes, you won't be able to claim the solar tax credit.


However, if you do owe federal taxes, you can carry the solar tax credit forward to future years if you can't use it all in the year that you installed your solar panel system.


For example, let's say that you installed a solar panel system in 2020 that cost $10,000 and your marginal tax rate is 25%. This means that you would be eligible for a $2,600 solar tax credit.


Now, let's say that you only owe $1,000 in federal taxes for 2020. In this case, you would only be able to use $1,000 of the solar tax credit to offset your taxes for 2020. The remaining $1,600 would carry forward to 2021, and you could use it to offset your taxes for that year.

Solar Energy Credit Example

To help you understand how the solar tax credit works, let's look at an example.

 

Imagine that you install a solar panel system that costs $10,000. With the federal solar tax credit, you would be able to deduct 26% of that cost from your taxes, which comes out to $2,600. So, if you owe $5,000 in federal taxes for the year, your bill would now be reduced to $2,400.

 

It's also important to note that you can carry the solar tax credit forward to future years if you can't use it all in the year that you installed your system. For example, let's say that you install a solar panel system in 2020 and you owe $3,000 in federal taxes for that year. You would only be able to deduct $2,600 from your taxes, since that's the limit of the solar tax credit.

 

However, you could carry the remaining $400 forward to future years and use it to offset your taxes in those years. There is no time limit on how long you can carry the solar tax credit forward.

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Solar Tax Credit Phaseout

The solar tax credit is set to decrease over time. Starting in 2022, the solar tax credit will be reduced to 22%. And, starting in 2023, it will be reduced again to 10%.

 

After 2023, the solar tax credit will no longer be available. So, if you're thinking about going solar, it's important to do it sooner rather than later if you want to take advantage of the solar tax credit.

Other Solar Incentives

In addition to the federal solar tax credit, there are also a number of state and local incentives that can help offset the cost of going solar. These incentives can vary significantly from one location to another, so it's important to do your research and see what's available in your area.

 

The Database of State Incentives for Renewables and Efficiency is a great resource for finding out about solar incentives in your state.

Solar Power Purchase Agreements

Solar Power Purchase Agreements

If you're interested in going solar but don't want to pay the full upfront cost of a solar panel system, you may be able to take advantage of a solar power purchase agreement (PPA). With a PPA, you can agree to buy solar energy system from a solar developer at a fixed price for a certain period of time, typically 20 years.


PPAs can make going solar more affordable since you don't have to pay the full upfront cost of the system. However, it's important to note that with a PPA, you will not be eligible for the federal solar tax credit since you will not own the solar panel system.

Solar Leases

Solar leases work similarly to solar PPAs, but there are a few key differences. With a solar lease, you lease the solar panel system from the solar developer and agree to pay a fixed monthly fee for a certain period of time, typically 20 years.

 

At the end of the lease term, you have the option to purchase the solar panel system or have it removed. Solar leases can make going solar more affordable since you don't have to pay the full upfront cost of the system. However, as with a PPA, you will not be eligible for the federal solar tax credit since you will not own the system.

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The Bottom Line

The federal solar tax credit can help offset the cost of going solar by reducing the amount of taxes you owe. The solar tax credit is set to decrease over time, so if you're thinking about going solar, it's important to do it sooner rather than later. There are also a number of state and local incentives that can help offset the cost of going solar.

 

If you're interested in going solar but don't want to pay the full upfront cost, you may be able to take advantage of a solar power purchase agreement or a solar lease. However, keep in mind that if you do not own the solar panel system, you will not be eligible for the federal solar tax credit.