We recently had a question from a client about solar panels and their potential tax advantages. We’re actually looking into a solar panel system ourselves as we continue with a new house build, so this couldn’t have been a more timely question!
Here’s the question in full:
We are considering installing solar panels this year, given the potential tax credit (and planned decrease in the credit over the next few years).
Does this seem like a reasonable tax strategy? Would this have any appreciable impact on our current tax situation?
Let’s dive in.
The Solar Tax Credit is a great tax advantage
The Solar Tax Credit, also known as the Investment Tax Credit (ITC) has been in existence since 2005, and though originally set to expire at the end of 2007, has been repeatedly extended through to 2021. The credit applies to both residential and commercial solar energy systems and currently allows you to deduct 26 percent of the cost of the installment of your system from your taxes. The 26% includes equipment, permits, and installation as it claimed back on your tax return.
Since its conception, this policy has been huge for the solar energy industry (and therefore the economy), and one of the most important incentives for clean energy usage in the United States.
How the solar tax credit works and how to claim it
In a nutshell, if you’re a taxpayer who owns a solar energy system, you’re eligible to claim the solar tax credit. This means if you’re considering leasing a system, you will not be eligible for the same tax saving.
You’ll claim the tax credit for your solar energy system when you file your yearly tax return, by completing an IRS Form 5695. As with all tax strategies, it’s important to keep all your receipts from day one of the project so you have the documentation when it comes to tax return time. This includes permitting, equipment, and installation- so keep them all!
Why rush now?
It’s proposed that the 26% deduction will drop each year until 2022 when it’ll remain at 10% permanently for the foreseeable future for both commercial and residential projects. So we can understand why the feeling is “do it now!” to reap the tax advantages while we can. But there are some considerations to factor in before you leap to an installation.
Important things to consider before going ahead
Incentives in your state
Our client who asked the original question is in Illinois, where there are incentivized solar programs specific to the state. Have a look at any solar energy incentives in your own state so you can make a better estimate of the costs based on the tax breaks and rebates in your own state.
How long it’ll take you to pay off based on your average monthly bills
If you paid $10,000 for your solar energy system, and you get roughly $3,000 in tax incentives, you’re looking at a cost of $7,000. Based on your average monthly electricity bill, how long do you estimate it would take to pay it off?
How long you plan to be in the house you’re installing them in
The house we’re building at the moment is going to be our forever home. We intend to be there until we retire, so the costs associated with the solar energy system would pay off. Think about how long you intend to be in the house you’re planning to invest in solar panels for.
Depending on the real estate market in your state, solar panels might be really favorable, so if you are going to be in your house for a shorter period of time, it may still pay off in the value it adds to the property when you sell.
Run these calculations first
See how long it’s going to take, think about how long you’re going to be in the house, consider your state’s specifics and your real estate market. Look at those factors first - and if you have any questions or uncertainties along the way, reach out and ask us. We may even be able to share a little more of our own experience as things progress!