Solar Tax Credit vs Deduction?
A Tax Deduction Only Reduces Your Taxable Income
A tax deduction is nice, but a tax credit is a far better financial opportunity. Here’s why:
This has a complex effect on your tax return, and deciding on the cash value of a standard tax deduction can be challenging. You must know your effective tax rate to make the calculation —or have a good estimate of it. It is a good idea to speak to an accountant about the process and have them create an estimate for you.
Imagine that you run a business and purchase $9,000 in equipment. This $9,000 becomes a tax deduction and at the end of the year, you can reduce your taxable income by $9,000, saving you a little bit of money.
How much? That depends on your tax rate.
For this example, assume that you have an effective tax rate of around 25%. When you reduce your taxable income by $9,000, the actual cash value of that deduction is only $2,250.
A Solar Tax Credit Is Different
A solar tax credit is a completely different situation. A solar tax credit will directly credit your tax account, wiping out any tax liability that you have on a one-to-one basis. This means that a renewable energy tax credit is exactly like cash—as long as you have enough tax liability to use it.
If you do not have enough tax liability in the first year, then most tax credits will pass forward to the following year. In the case of the Federal Renewable Energy Tax Credit, you can pass this credit forward for up to 20 years.
A Solar Tax Credit Acts Just Like Cash
For example, assume you install a brand new solar energy system with a small down payment, financing the rest.
If the solar array cost you $30,000 total, you would immediately receive a federal tax credit worth 30% of this cost.
This means you could immediately remove up to $9,000 in tax charges from your tax return. If you usually receive a refund, this would immediately increase your refund by up to $9,000.
How the Federal Solar Tax Credit is Calculated
You do not need to know your effective tax rate for a solar tax credit because a solar tax credit acts like cash.
Total Cost of Solar Installation (ballpark example):
Immediate Federal Tax Credit
$10,000 x 30% = $3,000
This $3,000 is immediately available to you in the tax year that you install the solar array. If you cannot use all of it in the first year, it simply passes forward until you can, for up to 20 years.
How to Claim a Federal Solar Tax Credit
Claiming the federal renewable energy credit is easy! There is a straightforward form called Form 5695 available online. The form only requires simple receipts from your installation. An ethical and qualified solar energy installer, like Sunbridge, can help you with the process if you have any questions. The form is easy to manage and we created a How-To File Guide to help you.