What is a Federal tax credit?

In simple words: They are the reward for going solar. They are also known as Investment Tax Credit (ITC). The Energy Policy Act 2005 enacted them. Since then the industry has grown by over 10,000% with an average annual growth of 50%.

It was first created with an expiry date of 2007. But the period was extended again and again. And currently, it offers.

  1. 30% tax credit between the years 2022 – 2032
  2. 26% tax credit in the year 2033
  3. 22% tax credit in the year 2034
  4. And it expired in 2035.

Who is eligible for ITC?

  1. You must owe tax to the Federal government
  2. You must buy and own the solar system. Solar installed by lease or PPA is not eligible for ITC.
  3. You must install the solar before 2035
  4. The property in which you installed the solar must be within the boundaries of the U.S.
  5. The panels and equipment should be first-hand. Installing used material doesn’t count for ITC.

What expenses are covered by ITC?

  1. Solar panels (excluding attic fans).
  2. Labor costs for installation, inspection costs, and developer fees.
  3. Other equipment like inverters, batteries, wires, and mounting equipment

Difference between Solar tax credit VS Tax Refund

Many people confuse this and use it interchangeably. But it is quite simple.

Refund refers to the amount that the government overcharged. When overcharged the government gives you a cashback. The tax credit is the dollar-to-dollar reduction of the tax you owe.

Let’s say you owe $7000 as tax. And you installed a solar system for $12,000. Now as the FTC is 30% of the amount spent. 30% of $12,000 = $4000. If we adjust the “tax amount” and the “tax credit” (i.e. $7000 – $4000), the amount now you owe as tax is $3000.

Both Tax credit and tax refund

If you have both tax credit and tax refund, then the tax credit is subtracted after the tax refund.

Let’s say you owe $7000 as tax. And you installed a solar system for $12,000. Now as the FTC is 30% of the amount spent. 30% of $12,000 = $4000.

But this time you also have a refund amount of $3000, then: $7000 – $3000 – $4000 = 0. Here, you owe nothing as tax.

Sometimes your tax credit would be higher than the amount you owe as tax. In that case, the tax credit balance is carried over to the next year.

For example, You owe $6000 as tax. The refund amount is $3000 and the tax credit is $4000. Then the remaining tax credit of $1000 will be deducted from the next year’s taxes.

By now you would get a fair outline of what ITC is, who is eligible, and the expenses which can be covered. On top of ITC, there are also policies at both state and municipality levels. And they also offer tax incentives for installing solar. But the policy will differ from state to state. So ask the local municipality to know more about the incentives offered at your state level.

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