Solar Tax Credit Extended for Two Years

A federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The solar tax credit for 2021 and 2022 is 26% of the cost of the solar installation but drops to 22% for 2023, the final year of the credit (unless extended again by Congress).

How the Solar Tax Credit Works

When you see TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 26% of the cost, and you only have to come up with the other 74%. But that is not the whole picture. It’s true that the federal government has a 26% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability. Any excess carries over to future years, as long as the credit still applies in future years. Currently, the credit is allowed through 2023. This means that you may not get all the credit in the first year, as you might have been led to believe.

Consider this example: In 2021, your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. The credit would reduce your tax liability to zero, and the other $2,500 ($6,500 – $4,000) of the credit is carried over to 2022’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or expires.

Is a Solar System Right for Me?

Compare the cost of the system (and the interest you will be paying, if you are financing it) to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale.

Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages, you may simply want to go green, or you may want to go off the grid where electric service is not reliable. 

If you plan to move forward with a solar installation, here are some of the tax issues you need to be aware of.

Qualifying Property for the Solar Tax Credit

Only the following solar power systems are eligible for the credit:

When is the Solar Tax Credit Available?

The credit may be claimed on the tax return of the year during which the installation is completed. For example, if you purchase and pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes an even a bigger issue for systems installed during 2023 that aren’t completed before 2024, when the credit rate will be zero. So, if you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024.

There is a lot to consider before making the final decision to install a solar system. Is it worth it? Is it the right financial move for you? Please call Cray Kaiser at (630) 953-4900 before signing any contract to make sure a solar system is appropriate for you.

Please note that this blog is based on tax laws effective in March 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.

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