Written by Sarah Hancock | Last Updated February 24th, 2020Sarah Hancock is passionate about green living and sustainability. She frequently writes about renewable energy and manages the Solar blog at BestCompany.com.
2019 is in full swing, and we have many exciting things to look forward to this year, including the FIFA Women’s World Cup, the birth of another royal baby, a $100 million Fortnite tournament, a new Avengers movie, and a Spice Girls reunion tour.
However, this year, there’s also an important happening in the solar industry that every homeowner should be aware of: the Federal Solar Tax Credit, also known as the Investment Tax Credit or ITC, will step down from 30 percent to 26 percent after 2019.
Established by the Energy Policy Act, the Federal Solar Tax Credit has been around since 2005 and provides a dollar-for-dollar income tax reduction on a percentage of the total cost of a solar power system. It is an extremely beneficial incentive for homeowners and can help them recoup a large portion of the total cost of a solar energy system. In fact, according to a recent poll from Branded Research, 16 percent of respondents said that taking advantage of the Federal Solar Tax Credit was their primary driver to purchase a solar energy system, more so than energy cost savings, environmental friendliness, and increased property values.
The Federal Solar Tax Credit was originally set to expire after 2007, but a series of government extensions pushed the expiration date back to the end of 2016. Then in 2015, Congress passed a bill that extended the expiration date again. Now, as is reflected in this graph from SolarTech, the step down schedule is as follows:
As you can see, 2019 is the last year to take advantage of the full 30 percent tax credit. In 2020, the tax credit will be reduced to 26 percent, then again to 22 percent in 2021. From 2022 onward, the residential portion of the Federal Solar Tax Credit will be eliminated entirely and only a 10 percent tax credit for commercial and industrial projects will remain.
The Federal Solar Tax Credit works by reducing the available percentage (i.e. in 2019, 30 percent) of the total cost of your solar energy system from your tax bill. To be eligible for the tax credit, the government only requires that you own the system by purchasing it either with cash or through a loan and that you have existent income tax liability for the credit to reduce.
If, for example, you purchase and install a $25,000 solar energy system in 2019 while the 30 percent credit is still up for grabs, you’ll receive a $7,500 credit to put towards reducing your income tax liability. If your owed income taxes for the year are lower than $7,500, the remainder of the credit can be rolled over to help reduce next year’s taxes.
To put this in perspective, if you purchase and install the same $25,000 solar energy system in 2020 after the tax credit has fallen to 26 percent, the credit you will receive will drop to $6,500. That means you’re missing out on an extra $1,000 in tax credit just by waiting to install a solar system.
If you’ve been considering a solar energy system for your home, don’t wait too long to make your move. The date that your solar panel system is placed into service determines the year you can claim your tax credit. In other words, if your system is installed on December 31, 2019, but not approved to operate until January 1, 2020, you’ll receive the 26 percent tax credit rather than the 30 percent tax credit.
While this isn’t as much of a concern earlier in the year, it can pose issues towards the end of the year. In many cases, due to factors such as permitting, financing approval, and utility approval, a solar project can takes weeks or even months to complete after contract signing. Additionally, as it gets closer and closer to the tax credit step down deadline, solar installers will likely become busier and busier as more homeowners try to complete their projects, meaning that your installation could be scheduled out further than normal.
Don’t let a project delay or a busy market stand between you and the maximum incentive of the 30 percent tax credit. If solar interests you or you think your home and family could benefit from a solar energy system, research top solar companies in your area today and take the next step towards a more affordable, sustainable future powered by clean energy.