Solar Investment Tax Credit (ITC) – 2021

Solar Investment Tax Credit

The solar Investment Tax Credit or ITC for short is the primary way the US Government has helped homeowners adopt solar.  As the name suggests the ITC is a Tax Credit for homeowners investing in solar energy systems for their homes (note: there is a commercial tax credit as well).   The value of solar investment tax credit recently increased for 2021 & 2022, and is now worth 26% of the total value of the purchased solar system.  A typical tax credit can be worth $6k – $15k (or more).

The math works like this. 

Tax Credit Value = .26 X Total System Price

If the system price is $30k, the tax credit would be $7,800  (.26 * $30,000)

What is a Tax Credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe.  For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000.1 The amount of taxes you normally owe at the end of the year, is also known as your tax liability.  

While the tax credit can be super valuable, a tax credit is not a rebate.  It is not a guaranteed check for a certain amount.

How do I Apply for the Solar Tax Credit

Paying taxes is a lot better when you don’t owe as muc

When you file your 2021 taxes, (and you have had solar installed on your home), you will need to fill out IRS Form 5695.2  You can find the instructions here.3  But you can also consult a tax professional if you need any help. Generally, you’ll need to know the solar system size and cost of the system installed.

How Does the Solar Tax Credit Work

Here are a few examples of how the solar tax credit could work (using some simple math with made up numbers for simplicity).   Each example or scenario is described, and then shown in table format, just in case you have a different learning style.

It is important to note that these are simplified examples and that if you have any questions about your situation, you should seek the counsel of a tax professional.  The examples below are only meant to give you a very basic understanding.

person resting their hand on table
Getting your taxes done!
Photo by Oleg Magni on Pexels.com
Employee – Scenario 1
  • You sit down and do your taxes and find out that your tax liability (how much you owe) is $1,000. 
  • The company you work for collects and pays your taxes all year (also called withholding).  They paid $1,000 on your behalf. 
  • Solar was installed on your home this year and you have a $1,000 Investment Tax Credit. 
  • The $1,000 Tax Credit lowers the amount you owe by $1,000 and now you owe $0. 
  • At this point, you actually owed $0, but your company paid (overpaid) $1,000 on your behalf.
  • The IRS will send you back any money overpaid on your behalf (your refund of $1,000). 

Shown in a Table

Tax Liability$1,000(how much you’d normally owe)
Tax Credit$1,000(the credit reduces how much you owe)
New Tax Liability$ 0(Your Tax Liability minus your Tax Credit)
Withholding$1,000(your money paid to the IRS by your company during the tax yr.)
Refund$1,000*(you get back money overpaid to the IRS. Money paid to the IRS above what was owed)
*In this case, the solar tax credit made your tax liability $0, but your company had collected $1,000. Meaning an extra $1,000 had been collected. You would get that back.
Employee – Scenario 2
  • You sit down and do your taxes and find out that your tax liability (how much you owe) is $1,000. 
  • The company you work for collects and pays your taxes all year (also called withholding).  They paid $1,000 on your behalf. 
  • You had solar installed on your home this year and have a $800 Investment Tax Credit. 
  • The $800 Tax Credit lowers the amount you owe by $800 and now you owe $200. 
  • Since $1,000 of your money has been paid by your company to the IRS, the IRS will send you back any money overpaid on your behalf (your refund of $800). 

Shown in a Table

Tax Liability$1,000(how much you’d normally owe)
Tax Credit$ 800(the credit reduces how much you owe)
New Tax Liability$ 200(Your Tax Liability minus your Tax Credit)
Withholding$1,000(your money paid to IRS by your company during the tax yr.)
Refund$ 800*(you get back money overpaid to IRS. Money paid to IRS above what was owed)
*In this case, you only owed $200, but your company had collected $1,000 from you. Meaning an extra $800 had been collected. You would get that back.
Employee – Scenario 3
  • You sit down and do your taxes and find out that your tax liability (how much you owe) is $1,000. 
  • The company you work for collects and pays your taxes all year (also called withholding).  They paid $1,000 on your behalf. 
  • You had solar installed on your home this year and have a $1,200 Investment Tax Credit. 
  • The $1,200 Tax Credit lowers the amount you owe by $1,000 and now you owe $0.  The tax credit cannot lower your tax liability to less than $0.  (you can ask your tax advisor if you’ll be able to roll-over any unused tax credit).
  • Since $1,000 of your money has been paid by your company to the IRS, the IRS will send you back any money overpaid on your behalf (your refund of $1,000). 

Shown in a Table

Tax Liability$1,000(how much you’d normally owe)
Tax Credit$1,200(the credit reduces how much you owe)
New Tax Liability$ 0*(Your Tax Liability minus your Tax Credit – see notes below)
Withholding$1,000(your money paid to IRS by your company during the tax yr.)
Refund$1,000(you get back money overpaid to IRS – Money paid to IRS above what was owed)
*Your tax liability can’t be less than $0 for the year.
*Talk to your tax professional about the potential to roll over any unused tax credit.
Self Employed – Scenario 4 (very basic example)
  • You sit down and do your taxes and find out that your tax liability (how much you owe) is $1,000. 
  • You have saved $1,000 all year, so you can pay your taxes at the end of the year.
  • Solar was installed on your home this year and have a $1,000 Investment Tax Credit. 
  • The $1,000 Tax Credit lowers the amount you owe by $1,000 and now you owe $0. 
  • Since you do not owe any money, you get to keep the $1,000 you saved, instead of paying it to the IRS.

Shown in a Table

Tax Liability$1,000(how much you’d normally owe)
Tax Credit$1,000(the credit reduces how much you owe)
New Tax Liability$ 0(Your Tax Liability minus your Tax Credit)
Saved$1,000(money you saved during the year)
Keep$1,000*(you get to keep your money)
*In this case, the solar tax credit made your tax liability $0, but your company had collected $1,000. Meaning an extra $1,000 had been collected. You would get that back.

Important

  • It’s very important to remember that a tax credit is not a rebate.
  • It is not a promise of a check from the government.
  • Please consult a tax professional if you need help with your individual taxes.  This is not tax advice.

Interesting?

If you’ve made it this far, you’re probably have a strong interest in solar for your home. If so, feel free to continue learning about solar on this site. We’ll be adding more videos and post soon. In fact, if you have a question we haven’t answered, please ask us. Perhaps we’ll feature your question next.

References:

  1. U.S. Dept of Energy: Guide to Federal Tax Credit for Residential Solar PV
  2. Internal Revenue Service: Form 5695
  3. Internal Revenue Service: Instructions for Form 5695

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