Solar Energy Tax Credit: Explained

The Solar Energy Tax Credit (also known as Investment Tax Credit/ ITC) was first introduced through the Energy Policy act of 2005.

It is a federal tax credit that incentivizes individuals to install forms of renewable/ alternative energy, solar energy in particular, on their properties as an investment. As a sustainable and cost effective way to create energy for your home over time, the ITC is an additional layer of benefit that is the cherry on top.

The tax implications of this tax credit is a dollar-for-dollar reduction from your federal income taxes. This credit however, can only be taken advantage of for a limited time before it expires. Below are the rates (as of June 2021) at which this credit can be applied depending on the year that the solar energy installation took place:

• 2016 - 2019 - 30% of costs may be deducted from federal taxes

• 2020 - 2022 - 26% of costs may be deducted from federal taxes

• 2023 - 22% of costs may be deducted from federal taxes

• 2024 - 10% of costs may be deducted from federal taxes

So long as you own this newly operating solar energy system in place at a primary or secondary residence, you are eligible to claim this tax credit upon filing of your annual tax return. The amount credited should not exceed the consumption of electricity in your residence.

Below is an example of this tax credit being applied:

• Cost of Installation of new solar panels (12/31/19): $21,000

• Solar Energy Credit Tax Rate: 30%

• Amount Credited to Federal Taxes: $21,000 * 30% = $7,000

There are other incentives (rebates, other tax credits) that may affect the ITC that can be applied to your annual return. Consult with your CPA or tax advisor for more information.