Federal Solar Tax Credits Are Expiring… Don’t Miss Out! (Actually they’ve been extended)
Yes, 2021 is the last year to take advantage of the current solar tax credits from the federal government. If you have ever thought about going solar, now is the time to make the leap. After 2021, all incentives expire. (edited to say: Actually, Congress has extended the incentive program. The federal Investment Tax Credit for solar projects will continue the current 26% credit for projects that begin construction in 2021 through the end of 2022, rather than expiring at the end of 2020. The incentive will drop to 22% for projects that begin construction by the end of 2023, and then fall to 10% for large-scale solar installations and to 0% for small scale projects in 2024.)
Many of our customers are excited about the federal tax credits for solar, but they have questions about how they actually work and how to access them. Let’s address some of the top FAQs about solar tax credits and incentives.
What exactly is the “solar rebate program”?
First of all, it’s not a rebate, although a lot of people call it that. The Residential Energy Efficient Property Credit (its official name) is a federal tax credit available to homeowners who take steps to make their homes energy efficient through solar electric installations, solar hot water heaters, geothermal heat pumps, small wind turbines or fuel cells. The percentage credit is dependent on the date of installation and, for solar photovoltaic installations, applies to the entire cost of the project.
As far as state solar incentives, currently the State of Florida does not offer any additional state incentives for going solar. If your home is located in a different state, you can research that state’s individual policies, often referred to as SREC (State Residential Energy Credit).
When do I get my check?
If you have a solar system installed on your home during one of the applicable periods, you can claim your federal tax credit for going solar by filing IRS tax form 5695 with your next tax return. As far as your “check,” that’s a confusion a lot of homeowners have–you won’t necessarily be receiving a check in the mail from the IRS for 26% of the cost of your system. Because this is a “non-refundable” tax credit, it will be applied against your tax liability. (This is different from a tax deduction, which only reduces your taxable income.) Tax credits are applied directly against the amount you owe. For example, if you owed the IRS $5,000 in taxes for that year, and your tax credit was $5,000, you would not owe them any taxes that year. If you owed the IRS $2,000 and your tax credit was $5,000, the IRS would show a balance of $3,000 in your favor (but they would not cut you a check). You would have a $3,000.00 balance to carry forward to a future year.
It is important to distinguish what you owe in taxes from what you owe at the time of filing. Most W-2 employees have taxes withheld directly from their paychecks, and this can feel like you “don’t owe the IRS anything” or “don’t pay taxes.” If you are not retired and not on social security disability, it is very likely that you pay the IRS some amount of income tax (or capital gains tax, etc.) Using the same example, if you owed the IRS $5,000 in taxes for that year, and you had $5,000 deducted from your paycheck and sent directly the IRS (meaning you owed $0 at the time of filing) and your tax credit was $5,000, the IRS would owe you a return of $5,000 – you would receive a check back from the IRS!
These are just examples meant to explain a concept. We are not tax experts and everyone’s tax situation is different, so for questions about your specific tax situation, be sure to talk to an experienced professional tax preparer or accountant. Caution, if your tax professional is unfamiliar with the IRS 5695 tax form, they may not provide accurate information, either.
If I don’t qualify for the tax credit, does it still make financial sense to go solar?
That depends, but most of the time, yes. There are a lot of factors that go into designing a solar system, including details about your roof, tree cover, your utility, etc., but most of the time, even homeowners who cannot leverage the tax credit are saving a significant amount over paying their utility for a couple of reasons. Firstly, overall, your monthly loan payment for your solar photovoltaic system will be about the same or slightly lower than your current utility bill, even without the tax credit. The amount of savings might not get you too excited right out of the gate until you consider that your utility bill is going to continue to increase in the months and years to come. (Like the sinking of the Titanic, it’s a mathematical certainty). In fact, here’s a true story: when our family moved to Central Florida in 2008, we were paying 7 cents per kilowatt/hour to our utility. In 2020, that same utility was charging 14 cents per kilowatt/hour! In 12 years, they literally doubled their price!
If you are paying cash for your system, things get even more exciting because you get to focus on overall ROI. Even without the federal tax credit, your return on investment is still over 6% on average year over year. Where else can you get a guaranteed 6% a year? If you are able to leverage the tax credit, that ROI goes up to between 9% and 12%. Your return will continue to go up as the utilities increase their rates because you are saving even more money. If utility rates continue to rise at their current levels (and there’s no reason they wouldn’t; one Florida utility has already gotten approval for a 28% rate hike over the next several years), you’re looking at a 15% to 20% return on investment after 10 years! Find a stock that’ll guarantee that kind of return!
If you’ve read this far, you probably already know that solar is a good idea and the right thing to do. The right time to do the right thing is now.
Coronado Solar is one of the best solar companies in Florida. With licenses in general contracting and roofing IN ADDITION to our solar license and an A+ rating with the BBB, we pride ourselves on being one of Florida’s premier solar companies. Our solar panels are some of the best in the business for your home and we even offer commercial solar installation. For a free quote, click HERE.