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How does the federal solar tax credit work? – Solar SME

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How does solar tax credit work? You can claim a federal tax credit on your total project cost if you want to invest in solar energy. Besides this, you can also get a liability claim on your solar investment. According to Energy policy act, the federal solar tax credit is 26% in 2020.

What is Federal solar tax credit?

The Federal Solar Tax Credit allows you to install a solar system on an easily accessible cost. Furthermore, you can claim 26% of your total project costs (including equipment, permitting and installation) as a credit on your federal tax return. Likewise, if you buy your solar system in $10,000, you will be able to pay $2,600 less in taxes the following year. In 2022, solar tax credit will expire.

When a person installs a solar power system, the government rewards them with a tax credit in solar energy which is basically money reduction of your income tax that you owe. Presently, the tax credit is very beneficial to go with solar energy if you really want to invest in your generations.


For example, let's say you owe $7,000 in federal taxes this year. Even If you claim a $4,000 tax credit, that pays off part of your liability. Therefore, you'll have to pay just $3,000 in taxes after the credit is applicable.

It's different than a refund because we have to owe taxes to claim the incentive. But mostly, people owe taxes and most of them end up being eligible.

History of the Federal solar tax credit?

In the Government of President George W. Bush passed the Energy Policy Act, 2005 in the U.S. After that government created Solar Investment Tax Credit (ITC). At that time the government took this initiative to allow people get solar energy. In that program, the government allows people to pay just 30% of the total system cost. It provides a window of opportunity to accelerate renewable energy deployment by creating market stability that will draw additional private sector investment. The Investment Tax Credit (ITC) for solar technologies were extended from December 2016 to December 2022, with a sustained, reduced tax credit for commercial and utility systems thereafter. Both the wind and solar tax credits reward early action, offering the largest credits in the initial period of the extensions and subsequently phasing down.

Federal tax credits help drive the deployment of clean energy technologies.

How much money do we save with Federal Solar Tax Credit?

As a matter of fact, the Solar Investment Tax Credit is worth 26% of the total system cost. Hence It also includes the value of the parts and the contractor's fees of installation.

“All good things must come to an end.”

How long will the Federal Solar Tax Credit stay in effect?

Your credit steps down in value over the next few years, until it disappears completely for residential customers in 2022. Here's the value of the federal tax credit over the coming years.

2020: 26%

2021: 22%

2022: 0% (10% for commercial projects)


Can I pay Tax credit with a credit card?

The IRS is an organization that doesn't accept credit card payments directly. Meanwhile, on its behalf, it has licensed several payment processors to accept credit card payments. On top of your tax bill usually around 2% these companies charge an additional fee. But keep in mind, that's on top of the taxes you already own.

How to claim solar Tax Credit?

Here are some of the things that you can claim when filing your tax returns for the solar tax credit:

  • Solar consulting fees
  • Solar equipment
  • Freight shipping costs
  • Tools and equipment
  • Professional installer fees
  • Engineer fees
  • Electrician fees
  • Wiring, screws, bolts, nails, etc.
  • Permitting service costs
  • Permitting fees

Importantly If you have the technical knowledge, you can do the installation yourself easily. But you can't claim your own labor for installing solar panels as part of the tax credit on your return. Although when filing your tax returns,

Confirm that you qualify for the 26% tax credit.

Gather all the necessary receipts.

Complete IRS Form 5965.

Download the 5965 form here: https://www.irs.gov/pub/irs-pdf/f5695.pdf

Find instructions to fill the form here: https://www.irs.gov/pub/irs-pdf/i5695.pdf

Add the credit to Form 1040.

After completion, you are effectively eligible for the 26% solar tax credit.

Originally Published on: Solar SME Inc. – How does the federal solar tax credit work?



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