Why You Need to Install Your Solar Panels Before 2021
Converting our energy use to more sustainable and environmentally friendly energy sources is growing in strength and demand – both with homeowners and as a manner of national importance. While you may be considering the benefits of installing a solar system in your home in the future, there is a compelling reason why you will want to act now and get it installed before December 31, 2020.
There is a Federal Tax Credit Reduction in 2021
The Solar Investment Tax Credit (ITC) was created in 2006 to support the implementation of more solar energy use within the United States. It initially granted a 30% tax credit. In 2020, the ITC was reduced to 26% for both residential and commercial installations. The tax credit will be further reduced from 26% to only 22% in 2021.
The Residential Tax Credit Ends in 2022
The Solar Investment Tax Credit drops to 0% for residential installations in 2022. The commercial tax credit will be reduced to 10%. It doesn’t look like there is going to be another extension such as was granted in 2015.
What is the Solar Investment Tax Credit?
If a homeowner installs solar panels before the end of 2021, they are given a dollar-for-dollar reduction in their income taxes. For example, an average solar system costs around $18,000. If solar panels are installed in your home during 2020, you will be able to subtract $4,680 from your federal tax bill.
Who is Eligible to Claim the Solar Tax Credit?
Anyone who meets the federal qualifications is eligible to claim the ITC. Under the residential credit, you must be the property owner, a member of a condominium, or a tenant-stockholder in a cooperative housing corporation who directly contributed to the solar PV system and meet all the following criteria:
- A solar photovoltaic (PV) system must be installed between January 1, 2006 and December 31, 2021.
- It must be an “original installation” of new equipment, not used.
- The solar panel system must be located at your primary or secondary residence within the United States.
- The solar system can be purchased with cash or financing but it cannot be leased nor can any solar power be purchased by the homeowner from another solar system.
What Solar Installation Costs are Included in the Tax Credit?
Homeowners can calculate the tax credit off the material and installation costs of any solar PV panels or cells, storage devices, wiring, inverters and mounting equipment. Installation costs can include site preparation, assembly, permitting fees, inspection costs, developer fees and includes any sales taxes plus the actual installation.
If you will receive a rebate or a tax credit from your state, it will not affect your federal tax credit. (Your state credit will, however, reduce your state taxes which will increase your federal taxes. So, there is a small impact.)
If you will receive a rebate from your utility company for installing a solar system, the rebate is subtracted from the installation cost and the federal credit is calculated off the remainder. If your utility company agrees to purchase excess current from you or provides you with a cash incentive, this is considered as taxable income and it will not reduce your tax credit.
Do You Have More ITC Questions?
Download the Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics prepared by the U.S. Department of Energy.
If you want to save an average of $4,700 on your solar energy system installation, make sure you have it installed before December 31, 2020!