Trends come and go, and without a doubt, some are healthier than others. Most people can get on board with the growing trend of yoga and health foods. When it comes to those weird lip challenges, not so much.
Fortunately, there are plenty of rising trends that are helping people as well as our planet. One of these is solar energy.
Solar energy is also one of the few trends that the government might subsidize. Here’s what you need to know about the solar energy tax credit and other tax incentives.
The Basics of the Federal Solar Energy Tax Credit
The solar energy tax credit that the federal government offers is called the solar investment tax credit, or ITC. Its purpose is to lower the financial burden for residential and commercial building owners who want to install solar energy systems.
This incentive gives you a tax credit for 30% of the cost of your solar system. This includes the solar panels and other equipment as well as the installation costs.
Keep in mind that this is a tax credit, not a tax deduction. A tax deduction merely lowers the amount of taxable income you have, which lowers the taxes that you owe as a result. In other words, if you have a $5,000 tax deduction and your tax rate comes to 20%, you’ll save 20% of $5,000, which is $1,000.
A tax credit, on the other hand, is a direct discount on your taxes. It takes money off your total tax burden, not your taxable income. If you have a $5,000 tax credit, you save the full $5,000.
It’s also important to note that the ITC applies to anything that generates significant energy for your home. In addition to solar panels and a full solar energy system, it includes solar water heaters and geothermal heating systems for example.
Who Is Eligible for the ITC?
The ITC is available for residential homeowners as well as anyone who owns a commercial building. The current tax credit is the same regardless of whether your building is residential or commercial.
There is no upper limit on the credit amount, so you don’t need to bargain shop for your solar energy system.
There is one tricky stipulation, though. The solar energy tax credit is only available if you’re installing solar energy for your primary residence.
If you have a summer home you only use for one month each year, switching it to solar energy won’t make much of a difference in the environment. The government wants to encourage people to make more impactful changes.
Of course, this could become murky if you rent out that summer home when you aren’t using it. It’s always a good idea to call our tax attorneys if you have questions.
Why You Want to Get the ITC in 2019
As 2019 draws to a close, now is the time to get started on your solar system.
While the ITC has been in place since 2006, it is being phased out soon. 2019 is the last tax year when you’ll be able to get the full 30% tax credit.
For the 2020 tax year, the tax credit will decrease to 26%. In 2021, it will be 22%.
By 2022, there will be no federal solar energy tax credit for residential homes. Commercial buildings will only be eligible for a tax credit of 10% of their cost.
That jump from 30% to 26% doesn’t sound like much, but it can have a significant impact. Let’s say you install a solar system that costs $15,000. The difference between starting the installation this year compared to next year is $600 in your pocket.
The good news is that you don’t need to install your entire solar system by the end of 2019, so don’t panic. You only need to begin construction in 2019.
What if Your Tax Burden Is Less Than the Credit Amount?
Let’s return to the example above of a $5,000 tax credit for installing your solar system. What happens if your total tax burden is less than $5,000? Does the government give you the extra money from its own pocket?
The bad news is that no, it doesn’t. You won’t get free money for installing your solar system. However, the remaining amount will roll over into the next tax year.
For instance, perhaps you’re eligible for a $5,000 tax credit but your total tax burden this year is only $4,000. You’ll get the $4,000 credit this year, and in 2020 you’ll get the remaining $1,000 credit.
How Do You Claim the ITC on Your Taxes?
After learning all this, the investment tax credit sounds fantastic and you’re ready to take advantage of it. How do you do that?
The ITC is a normal part of filing your income tax return. Of course, you need to have the necessary documentation first in case you’re targeted for an IRS audit.
That documentation includes information about the price of your solar system. It also includes proof of when construction began so the IRS knows that your installation is valid for the 2019 tax year. There are specific ITC guidelines about how to prove the construction’s start date.
State Tax Incentives for Solar Energy
The federal government isn’t the only organization that wants people to live more eco-friendly lives. Many state governments offer their own tax incentives to encourage renewable energy too.
Whether you’re near our Florida office or our Michigan office, there are ways to reduce the financial strain of installing a solar system.
State Tax Credits for Solar Energy in Florida
Floridians, like everyone else in the US, are able to take advantage of the federal tax credit for their federal income taxes. However, Flordia’s government is offering two additional incentives.
Property Tax Exemption
As you well know, your property tax is based on your home’s value. In most cases, major home improvements that add value to your home will come with a steep property tax increase.
That isn’t the case in Florida. This state has a program called the Property Tax Exclusion for Residential Renewable Energy. When homeowners install a solar system, it won’t increase their property taxes.
This may not put instant money into your pocket, but it does in the long-term. When you sell your house, it will bring a higher price because of the solar system, even though you were paying a lower property tax rate for it.
Sales Tax Exemption
It’s every taxpayer’s frustration that our federal, state, and local governments find so many opportunities to take our money. They tax income, property ownership, sales, vehicles, and the list goes on.
In Florida, though, the state government is passing up the opportunity for sales tax on solar energy. You can enjoy your new solar system without the added cost of sales tax. In effect, that’s the same as getting a 6% discount, which can add up to hundreds of dollars.
Michigan State Tax Incentives
If you’re a Michigan resident and you’re feeling hopeful after reading about Florida’s incentives, we have bad news. Michigan doesn’t offer any direct tax incentives for solar energy. Of course, you’re still eligible for the ITC on your federal tax return, but there are no additional tax breaks from the state.
There is still good news, though. The state of Michigan has found other ways to help residents who want to install environmentally friendly energy.
They offer a program called Michigan Saves. This program provides low-interest loans to people who want to install a solar energy system. Considering that solar energy is known for its high initial cost, these loans make solar power possible for a larger number of people.
Why the Michigan Saves Program Is So Helpful
In a way, this program can put money back into your pocket too. Let’s say your solar energy system costs $15,000 between the equipment and the installation.
You don’t have that money available, so you put that $15,000 on a credit card. The average credit card interest rate is 19.21%. If you spend ten years paying that off, you’ll pay around $18,000 in interest on top of the original $15,000.
The interest rates vary for Michigan Saves loans, but the average is about 6%. With a $15,000 loan that you pay over the course of ten years, you’ll pay less than $5,000 in interest. You’re saving about $13,000.
Taking Advantage of the Solar Energy Tax Credit
Solar energy is a powerful step forward for our planet. It’s a way to use technology to harness the renewable resources nature offers us every day. Buying from local suppliers can also be a great way to support your local economy.
No matter why or how you want to bring solar energy to your home, the ITC solar energy tax credit is a helping hand. It allows you to get over the initial cost and start enjoying the clean energy as well as the savings it brings you.
Of course, when it comes to taxes, there are always ways that a situation could go wrong. If you’re in a bind or if you have questions about your tax situation, call our tax attorneys today.