Solar Tax Credit (ITC) Explained

I hope this explanation is simple to understand. A note before I explain how the tax credit works. I am not a licensed tax professional and so I recommend talking with your tax professional to verify you are eligible. With that being said, it is very easy to understand and here is how it works. The Solar Tax credit is a Federal Income Tax Credit which means that you need to be paying federal income taxes in order to be eligible. Through 2032, 30% of the total cost of the solar system can be applied for with your taxes.

If your system's total cost is $40,000, 30% of that is $12,000. This means that when you file your taxes, you'll be eligible for up to a $12,000 tax savings for the year. 

If you are a W2 employee-

For employees, taxes are routinely taken out all year and many receive a refund for overpaying at the end of the year. Many get confused and think that if they are already receiving a refund that they are not eligible for the tax credit but this is not the case at all. Let's say you throughout the year you may a total of $10,000 in federal income taxes and at the end of the year, your normal refund would be $1000 because the IRS calculated that they took too much from you that year. This means that you paid $9,000 dollars for the year and this is the amount you can now use the federal tax credit against. In the example I use a $40,000 system, equalling a $12,000 tax credit. 

In this case, instead of only receiving a $1,000 check like normal, they will receive a check for all $10,000 they paid throughout the year and will still have $3,000 in unused tax credit that will be sitting there to be used next year. So, for employees, the tax credit means a larger refund check that normal up the amount you paid in that year. 

For 1099 or business owners-

1099 and Business owners must track their own taxes and pay either quarterly or annually. In some ways the tax credit is even simpler in this case. Let's say that as a 1099 contractor you are expected to pay $9,000 in income tax at the end of the year but you've been paid in full with no taxes taken out. In this case instead of paying $9,000, the IRS will simply subtract the amount off your bill and in this scenario there is even $3,000 unused that will be there for next year. 

1. You have 5 consecutive tax years to take the full tax credit amount. Unused tax credits will be available for you the following year. It is not a one year "use it or lose it" situation.
2. You can receive the tax credit more than once if you upgrade your system or sell your house and move to a new house and install another system there. 
3. Receiving the tax credit for a home that is not your primary or a rental is not impossible but tricky and so I suggest speaking with an experienced tax professional if this is the case. 
4. There is an equivalent business tax credit for commercial properties. If your rental is in an LLC,  this is how you would file in this case.