Taxpayers can claim a 30% federal tax credit on qualified expenditures for a solar power system. The credit has been extended until December 31st, 2021, but will be reduced to 26% in 2020, and 22% in 2021.
Whether it is a solar panel system or a solar water heating system, qualified expenditures include equipment and labor costs. Equipment expenditures are calculated after the installation is complete. A credit for labor costs is only available if the system is installed by a professional.
Solar Panel Systems
The home with the installed solar power system doesn’t have to be the taxpayer’s principal residence to receive the credit. To receive the full credit for a second home, you must live there for more than 80% of the year. Otherwise, you can only receive a percentage of the credit based on the time lived in that home.
You can’t get back more than you paid in taxes, so sometimes the full credit amount cannot be claimed. In this case, the unclaimed portion can be carried over to the next year and there is no maximum credit limit.
Solar Water Heating Systems
The criteria for solar water heating systems and solar panel systems are the same, with just a few additional requirements for the water heating systems. In order to qualify for a rebate, the equipment used needs to be certified by the SRCC (Solar Rating Certification Corporation), or by a similar local state-endorsed entity. The home must draw at least half of its hot water from the solar system in order to be eligible for the credit. The credit does not apply to solar water heating systems that are used for hot tubs or swimming pools.
Other Renewable Energy Systems
The other systems covered by tax credits include fuel cell properties, small wind energy properties, and geothermal heat pumps. Small wind energy properties and geothermal heat pumps do not have a maximum credit limit, but fuel cell properties have a limit of $500 per half-kilowatt. Other specifications for fuel cells include the requirement that the fuel cell must use an electrochemical process that has an electricity-only generation efficiency higher than 30 percent.
How to File for the Tax Credit
IRS tax form 5695: Residential Energy Credits will need to be filed with your tax return. Make sure to save receipts and the Manufacturer’s Certification Statement. This is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. Manufacturers should provide these on their website or you can call the manufacturer directly. The Certification Statement does not have to be filed with your tax return but you should keep it for your own records.
If for some reason you did not claim the credit in a prior year, you may still receive the credit. However, you cannot claim the energy credit for a year it was not installed. An amendment will need to be filed for the year the improvement was made.
This information is not intended to take the place of expert advice. Consult a tax professional for more information or help in filing for the credit.
History of the Federal Tax Credit
This federal tax credit was established in 2005 by The Energy Policy Act. Initially, it only applied to fuel cells, solar power systems, and solar water heating systems. The tax credit was extended to geothermal heat pumps and small wind energy systems in 2008 by the Energy Improvement and Extension Act.
Other revisions to the initial act include,
- The initial 8-year extension which expired on December 31, 2016
- The subsequent extension to 2021
- The removal of the $2000 credit cap on solar power systems, which was enacted in 2009
- The American Recovery and Reinvestment Act removed the maximum credit limit for solar power systems, solar water heating systems, geothermal heat pumps and small wind energy systems.
Will You Take Advantage of the Federal Tax Credit?
Installing a solar power system is now greatly incentivized by the federal government, but this is set to change in the future. Whether the tax credits carry on after 2021 remains to be seen. But if you are planning to install a solar power system, it’s best to act before 2020 and take advantage of the 30% tax credit.