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Solar Federal Tax Credits Explained

With the recent advancements in solar technology, homeowners can now produce their own electricity instead of depending on utility companies to power their homes. And because the Federal Tax Credit has been extended to 2032, going solar is extremely advantageous, potentially reducing the cost of your solar panel installation by up to 30%!

A tax credit is a reduction in the amount of taxes you owe. The typical homeowner that goes solar pays, on average, $30,000 for a 7.5-kilowatt solar installation. For such a system, a 26% Federal Tax Credit could reduce your taxes by $9,000—and that’s not even counting other credits available or promotional offers. If you know the eligibility requirements and how to claim it, taking advantage of this credit is very easy.

NOTE: We’re not tax experts, so we don’t give tax advice. The material made available on this page is used to explain the Federal Tax Credit and is not designed to specifically solve any unique issue. Not everyone will be eligible, so please consult a tax professional before filing your tax credit.

Tax Credit vs. Tax Rebate

It’s important to remember that the Federal Tax Credit is not a rebate. Tax credits serve to offset the balance of tax owed to the govt (if you don’t owe tax to the federal govt, there’s nothing to offset against the cost of your system). Tax rebates are payments (usually in the form of checks or deposits) to the taxpayer even if they aren’t paying taxes. While most customers of solar qualify for the Federal Tax Credit, some do not. Those that don’t pay federal income taxes will not be able to benefit from the tax credit. Additionally, if you’re on a fixed income, retired, or earned an income only for part of the year, you might not pay enough taxes to take full advantage of this credit. If you pay sufficient federal taxes the year that you finance or purchase your system, then the credit can be applied to pay off the taxes paid. If you already paid taxes by withholding them from your paycheck, the federal government will apply the tax credit to a tax refund. This refund can be used to pay down the balance on a Green Solar Technologies loan. It’s important to consider that the tax credit can be carried forward one year, which means that you can use any remainder from this year as a credit towards next year’s taxes.

Example 1:

Homeowner #1 buys a $30,000 solar energy system. They are eligible for a $9,000 tax credit (30% of system costs). Through their employment, they pay the federal govt $9,000 in taxes, but this is withheld on their W-9 so they end up paying nothing when they file. In this example, when the Federal Tax Credit is applied to the $0 balance they pay the government, they receive a tax REFUND of $9,000 that they can then apply to their GST loan—or keep if they choose.

Example 2:

Homeowner #2 also buys a $30,000 solar energy system, but only pays $4,500 in federal taxes because they were on a fixed income. This customer did not withhold any money from their paychecks and pays the full $4,500 when they file. When the $9,000 tax credit is applied, they can only claim $4,500 of it because they only paid that much in taxes. In this example, the customer does not have to pay any taxes that year but they also will not receive a refund check from the IRS. The good news is that any remaining tax credit can be carried forward and applied to next year’s taxes. In this scenario, if Homeowner #2 pays the government at least $4,500 in taxes for the following year, they can utilize the rest of the credit.

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