What You Need to Know About the Solar Tax Credit in 2021
Over the last decade and a half, solar contractors all over the country have been championing the tax savings of the federal solar tax credit as a big economic benefit for solar installation, and for good reason. This financial incentive for solar installation has allowed homeowners and business owners here in Arizona to reduce their net cost of installation by nearly a third!
However, after this tax credit, known as the federal Investment Tax Credit, was reduced down to 26% at the beginning of 2020, it was scheduled to drop again in 2021 for it’s final year. Then at the final buzzer of last year, Congress extended the solar tax credit as part of the omnibus spending bill that was passed and signed into law.
This extension means the 26% tax credit rate will remain for another two years! Customers now have extra time to take advantage of the higher tax credit savings when you install solar panels on your Phoenix, AZ home! So here’s how it works.
What is the Solar Tax Credit?
Up until now, the federal solar tax credit, known formally as the Investment Tax Credit or ITC, was scheduled to end as of 2022 for homeowners, with the exception of a 10% commercial tax credit that would remain. This tax credit for renewable energy was enacted in 2006, and allowed those that invested in solar energy (and other eligible renewables) to subtract from their taxes a total of 30% of their total solar installation costs.
Back in 2015, this tax break was extended and the end of the ITC was scheduled to decline, moving from a 30% tax credit in 2019, to a 26% credit in 2020, a 22% credit in 2021, and then the residential ITC would be gone forever.
You can read more about how the tax credit works here.
What the Solar Tax Credit Extension Means For You
Right before the end of the year, Congress extended the ITC for another two year. This means that the decline from 26% down to 22% is frozen in place at 26% for the remainder of 2021 and 2022, and the end of the residential ITC has been pushed back to 2024!
- 2021: 22% >> 26%
- 2022: 0% >> 26%
- 2023: 22%
- 2024: 0% and 10% for commercial
So, what does that mean for Arizonans who are looking to go solar this year? It means you have more time to take advantage of the higher rate of the solar tax credit and prepare your home for going solar!
How much can you save with the solar tax credit in 2021?
For example, if your solar installation costs were $20,000, you can take 26% of those total costs and subtract them from what you owe in federal taxes on your tax return. That’s a savings of $5,200 from taxes you would normally be required to pay!
If the ITC had not been extended, the tax credit savings would have added up to $4,400 at the previously scheduled 22% rate – that’s $800 less. So, the tax credit extension just gave homeowners looking to reduce their carbon footprint and take their energy into their own hands hundreds of dollars in tax savings!
Bonus ITC Savings: If the amount you are allowed to reduce from your taxes is greater than what you owe, you can rollover the remainder into the next tax year, so that all of the tax savings can be utilized for their intended purpose.
How to Qualify for the Solar Tax Credit
This all sounds great, but what do you need to know ahead of time about qualifying for these tax savings? In order to qualify for the Federal Investment Tax Credit, you must:
- Own your own solar panels (no solar leases)
- Own your property
- System must be placed in service by Dec. 31, 2022 (for the 26% rate)
You must also have enough taxable income to utilize the allowed deduction. For commercial systems, all of the above qualify with the exception that the installation project is only required to begin construction by Dec. 31, 2022 or meet the 5% safe harbor qualifications and the project must be completed by the fourth calendar year.
Why Take Advantage of the Solar Tax Credit in 2021?
Reduce Before You Produce
Even after the extension, time is of the essence when it comes to saving on solar. Of course, the earlier you install solar the more you stand to save on your energy bill. But if you are hoping to reduce the energy demand in your home first, which is an extremely important aspect of energy management, you are going to want to get started now on any energy efficient upgrades to your home before starting and completing your solar installation. Having a smaller energy demand, means a small and cheaper solar energy system to offset your energy consumption.
Our solar and energy experts can perform a solar needs analysis to identify and plan your energy goals before going solar. Get your project on the calendar before the schedule fills up, and you miss out on these savings!
Combine Battery Storage
When it comes to weighing Arizona solar panel pros and cons, there are multiple ways that installing solar panels can save you money. We already mentioned the savings on installation costs, but solar panels will also help you save on your energy bill for the lifetime of the system. Considering the industry standard for solar panel warranties is 25 years, you can bet your bottom dollar that your solar PV system will provide two and a half decades of energy savings.
However, if you are looking to partner with an Arizona solar installer that can help you reduce or eliminate your grid-supplied energy costs, Southface Solar can help you integrate a solar battery solution with your solar PV system. Solar batteries can qualify for the savings of the tax credits mentioned above, as long as the battery system derives 100% of its energy from a renewable source, like your new solar panels.
