How Do Solar Tax Credits Work?

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Summer and Solar is Here

As we move into the hottest days of summer – the time of year we experience the highest energy consumption – many rate payers are once again thinking about solar power to help offset their electric utility bills. Photovoltaic solar panels use the power of the sun’s energy to generate electricity that can be used immediately, or fed back into the grid for a credit. By doing this, a major portion of the electric bill for most households can be reduced or eliminated.

However, the problem with installing solar panels for most homeowners is the initial cost of the system. That’s why the Federal Government created a program to help homeowners offset a portion of the expense of installing solar panels. The solar investment tax credit (ITC) was enacted in 2008 and included $18 billion in incentives for clean and renewable energy technologies. It mandated that the solar ITC be made available to homeowners starting in 2009 and continuing through at least December 31st, 2016.

So How Does It Work?

The solar ITC program allows for a tax credit of 30% of the cost of installing a solar PV system, and it applies to any residential utility customer who has a federal tax liability. Since this is a credit, it is used to offset any taxes you owe to the federal government, which is why a tax liability is required. Don’t be discouraged though. If the potential tax credit exceeds your liability in the current year, it can be rolled into the following year for the remainder of the credit.

One of the things Congress did right in the drafting of this legislation was that they removed a cap that had previously existed in the tax credit program. Prior to 2009, the maximum credit that could be received was $2,000; but that’s no longer the case. Under this program the only limit to the amount you can receive the 30% credit for is your total taxes owed.

How much could I save on my energy bill?

For this part of the discussion, it’s important to recognize the difference between a tax credit and a tax deduction. A deduction reduces the amount of your taxable income based on the rate you pay for the tax bracket you’re in. So if your income is $80,000 and you’re in the 28% bracket, your tax liability is $22,400. A $6,000 deduction then means your tax liability is reduced to $74,000 and the amount you’d owe in taxes would be $20,720.

A credit on the other hand, means that the entire $6,000 is applied to your tax liability and the amount you would owe is now $16,400 – an immediate savings of $4,320!

While it’s true that solar PV systems are still an expensive outlay, these solar tax credits make them more affordable. State and local incentives can also help offset the costs, depending on where you live. And keep in mind, the amount you save in electricity each month means that a solar system could pay for itself within as little as 5 years. Now that’s something to get excited about!

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