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The Most Important Things To Know About The Solar Federal Investment Tax Credit (EXTENSION UPDATE)

Updated: Jan 29, 2021

Hoes does the solar investment tax credit work in 2020?
Federal Solar Investment Tax Credit


One of the first things homeowners ask about when exploring solar is the solar tax credit. The Investment Tax Credit (ITC) or federal solar tax credit, as it is sometimes called, provides homeowners with the ability to deduct 26 percent of the full cost of installing a solar energy system from their federal taxes.

The ITC applies to all homeowners who purchase a system, and the amount that can be deducted is not capped.

The Investment Tax Credit saves our customers, on average, around $9,0000, providing a massive financial benefit for installing solar energy systems.

Going into 2021 it looked like the solar tax credit would begin stepping down from 26% to 0% in 2022 for residential customers. As a result of the last Covid Stimulus package of 2020, the tax credit has been extended. This provides more homeowners a chance to take advantage of the credit and improve the ROI on a solar installation!

What is the history of the solar Investment Tax Credit?

The Investment Tax Credit was initially part of the Energy Policy Act of 2005 and was implemented to provide tax incentives to energy production that would help the nation move forward more efficiently. Although it was designated to expire in 2007, support for the ITC inspired Congress to extend the credit.

Understand how the solar investment tax credit steps down
Federal Solar Tax Credit Step Down

Since its creation, the ITC has been extended multiple times. In its current form, the solar Investment Tax Credit will be available to homeowners until 2023.

  • 2016 – 2019: The ITC is set at 30 percent of the cost of the system.

  • 2020: Owners of a new solar energy system can deduct 26 percent of the system's cost from their taxes.

  • 2021-2022: Because of work done during the last Covid Stimulas agreement, the solar tax credit was extended at 26% until 2022.

  • 2023- The solar tax credit for residential customers will step down to 22 percent of the system's cost from their taxes.

  • 2024 and beyond: There is no federal credit for residential solar energy systems but a 10% tax credit for commercial solar installations.

How does the Investment Tax Credit (ITC) work for homeowners?

If a homeowner purchases their solar system (either through finance or cash), they are eligible for the solar Investment Tax Credit. Not everyone can use the full tax credit in year one if they do not have sufficient tax liability. The ITC is designed to take this into effect and allows homeowners to "rollover" the remaining credits into future years until the entire tax credit has even been utilized.

How do homeowners claim the solar tax credit?

Homeowners claim the solar tax credit on their system on their yearly federal tax returns. If a homeowner works with a tax professional or accountant, the homeowner should make sure that the accountant knows they went solar the previous year. If a homeowner files their own taxes, they should follow the step-by-step guide provided by Alchemy Solar.

If you have questions about how the ITC works, please schedule a free consultation with Alchemy Solar today.

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