How the Solar Tax Credit Works
The way the Federal Solar Tax Credit works is that homeowners or business owners who install solar receive a federal income tax credit worth a certain percentage of the cost of their solar installation. They have to own the solar system, which means that they have to either buy it with cash or finance it. It cannot be a leased system.
What this does is bring down the total cost of the solar installation, which makes it within reach of a much larger percentage of the population. This has proven to be a successful model, based on the results of its implementation over the last 12 years.
So let’s look at an example of how this would work with an average sized solar system. Let’s look at a $20,000 dollar system.
Since its original implementation, the Solar Tax Credit has been at 30%. So what we do is multiply that percentage by the total cost of the installation ($20,000)
$20,000 X 30% = $6,000
So that $6,000 is what the home or business owners would receive as an income tax credit. So if the homeowner owes $12,000 on their federal income taxes, that amount would be reduced to $6,000.
That takes the full price of the system down to:
$20,000 – $6,000 = $14,000
So the final cost would be $14,000 with the Tax Credit included.
If the home or business owner doesn’t owe that much on their taxes, the credit can be rolled over to following years. So even if what you owe isn’t that much every year, the tax credit could reduce what you owe for years to come.
This formula has been the driver for solar’s success. This massive Tax Credit has served as an extremely effective incentive as it has stood so far. Now, in 2020, the Tax Credit is scheduled to reduce, but not by much.
What is the Solar Tax Credit for 2020?
In 2020, the Federal Solar Tax Credit is scheduled to reduce to 26%, down 4% from previous years. This has been planned since the extension in 2015, so homeowners have known it was coming for years.
The Tax Credit is scheduled to continue to decrease over the next two years, down to 22% in 2021, then down to 0% by 2022 for residential installations, leaving a 10% credit for commercial installations only. So for the next two years, there’s still substantial savings to be gained by installing solar.
So let’s do that same math in the example earlier, but with the 2020 26% Tax Credit instead of the full 30%.
So that same $20,000 system will now be reduced by 26%.
$20,000 X 26% = $5,200
So instead of a $6,000 Tax Credit, you will receive a $5,200 Tax Credit.
$20,000 – $5,200 = $14,800
That makes the total price of installation $14,800. So only $800 more than the total price with the 30% Tax Credit. While that $800 is 4% of the total, it’s still not a huge loss, especially compared to the $5,200 you can get off with the credit.
So if you’ve been deterred from going solar because the Solar Tax Credit has decreased, you may want to rethink your decision. The truth is, the Solar Tax Credit is still very substantial, and will be for two more years. If you let the slight decrease completely deter you from going solar, you will be missing out on huge savings.