Anyone looking into going solar has likely factored in the benefits of a 30% tax credit. That’s a large amount taken off the cost. But how do you know if it applies to you or even more importantly, will you ever get to take advantage of the credits? Fortunately, we may have some info that will help you – a savvy homeowner – discern how much you’ll save with solar panels. This information comes from Edward Robles, an Enrolled Agent certified by the IRS, to discuss what homeowners should know about the Investment Tax Credit (ITC) before going solar. If you’re just looking for the appropriate tax form, here it is. Mr.Robles has been helping people claim their solar tax credits since 2011 and has solar panels on his roof. See his contact information below.
If a homeowner is taking money out of his pension and pays taxes on that money, will that qualify him for the federal income tax credit?
Yes. When you pay taxes on your pension (regular distribution or lump-sum distribution) the income taxes qualify to be offset. Now if someone is getting early distribution and having to pay a penalty on that distribution, that penalty – although technically taxed – comes after the tax credit. So, if they purchase a $30,000 solar panel system, they will pay whatever their income tax bracket is on that system and then pay an additional $3,000. So they would get $9,000 in tax credit then have to pay that $3,000 penalty.
Can you confirm that the tax credit rolls over every year until used entirely?
The IRS continues to not provide clear guidance on this matter. But, what I can tell you, is we’ve all assumed so long as there is a form 5695 to be filed, there will be a line to carry forward. So it’s safe to assume the rollover will continue at least until 2034 (when the tax credit is set to expire).
What is the ideal tax bracket for someone to get all of the 30% tax credit in one year?
This could play out a couple of different ways, but the most common approach would be a married couple without kids that are W-2 wage earners making jointly $100,000 a year or more. They will likely get the full amount back the first year. People that make less or are self-employed (even if they make $100k or more) may have trouble getting the entire tax credit back in one year.
Can you sell all or part of your FITC to an eligible third party if you are a homeowner?
Unfortunately, no. However, businesses that own residential properties and commercial properties can do so. Basically, if you are a landlord, have an LLC, or rent out your property – whether it’s AirBnb or long term – you can qualify to sell all or part of it. However, it’s worth mentioning the people selling them have no idea how to claim the income and the people buying them have no idea how to claim the credit as of yet. Not until they file taxes for 2023 will this have been attempted.
What’re the differences between a refundable credit and a non-refundable credit as it relates to the solar tax credit?
The most important thing to consider is the order in which credits apply to taxes owed each year. Non-refundable always hits your tax liability first, then refundable credits. The FITC, a non-refundable tax credit, only hits your tax liability after a few other credits get deducted. Here’s a brief list of the tax credits that reduce your liability before the solar tax credit:
- Foreign tax credit
- Dependent care expenses
- Education credits (non-refundable ones)
- Retirement savings credit
- Energy efficient doors, windows, and insulation
- Electric vehicle credit
- Child tax credit (most of them)
- Adoption tax credit
If these credits wipe out the tax liability before the solar one can be applied, then you may not see any difference in your taxes owed despite having gone solar. Parents may not get to use their tax credit until a child turns 18. It just depends on how large of a tax liability you have.
Your tax liability is based on your income – which includes all types of income. Additional taxes that are levied such as self-employment taxes, minimal tax, penalties on early distribution, etc. come into effect after the solar tax credit is applied. So, someone who’s self-employed making $100,000 each year will still have the $15,000 in self-employment taxes to pay even if they have $15,000 in solar tax credits.
If the homeowner doesn’t pay an income tax, can they pass the solar tax credit down to a child?
No. If the homeowner is, for example, a pensioner, they will never receive the credit. Their children will not be able to inherit the tax credit if they were to die.
There are a few ways around it though. The child could qualify for the solar tax credit if they live in your house (and, of course, had an income tax to pay and met the basic qualifications for the tax credit) and the parent gifted the solar panel system to them. For more information on “gifting” meet with your tax expert.
What if you own the solar panel system, but not the house. Could you still qualify for the tax credit?
Technically, no. You could need to provide proof that you live in the house.
Can you add an entire roof cost in with solar or just part of it to claim the 30% tax credit?
No. Unless the work done on the roof is directly related to the system (i.e. having to move an air vent to make room for the solar panel system) could the tax credit be applied to that specific cost.
What about a pergola?
Yes, if the solar panels are installed on a structure built for the panels (i.e. carport, pergola, patio), the cost of structure qualifies for the tax credit.
Can the solar tax credit be applied to panels added to the system?
Yes. Whether the panels get added to an existing system or the same property owner gets panels installed on a different location, the tax credit can be applied.
If I sell my home, would the solar tax credit transfer to the new owner?
No. The original owner would have the tax credit even if they no longer live in the home. Furthermore, the original owner may not get to use the tax credit until long after they sold the house depending on any additional tax credits they may have.