Time to Go Solar?

Have you considered adding solar panels to your home? Most people do so out of a desire to improve the environment, but there are specific tax advantages to installing solar as quickly as possible, because the advantages are declining, and will be completely gone after 2021 unless Congress extends the deadline.

In brief: If you completely install a solar system by December 31, you can get a tax credit of 26% of the cost (not including installation). In 2020 the credit was 30%; in 2021 it will be 26%. In 2023 it will be 22%. After that the credit goes away, short of Congressional intervention.

What does that mean? A tax credit is different from a tax deduction: It’s much better. A tax deduction reduces your taxable income, but a tax credit reduces your actual taxes. So if you owe $2,500 in taxes for 2020 but installed a $10,000 solar system, you get a tax credit of $2,600, which means a tax refund of $100 instead of a tax debt of $2,500.

By comparison, if you owed $2,500 in taxes in 2021 but installed a $10,000 solar system that year, you would get a tax credit of $2,200, which means you would still have a tax debt of $300.

As good as this sounds, it is not for everyone. The very first client I ever encountered who had installed solar, had a major disappointment: Not a cent of the tax credit was any use for her. Why not?

It was no use for her because her income was so low that she had what I call a “zero return”: A tax return with no taxes owed and none refunded. She installed her solar early enough to get the 30% tax credit, and planned to apply the resulting refund to pay off the solar panels early. The only problem was, the tax credit is “non refundable”, which means it may not cause a refund. If you owe zero taxes, you can take none of the credit. Sure, you can carry it forward to the next year, but if in later years you also owe no taxes, you will never get a chance to take advantage of the refund.

If the client made a mistake, it was through no fault of her own: The salesman assured her she was eligible for the credit. But was the salesman a tax expert? Certainly not. In fact, he was incentivized to not know the truth.

The smart thing to do, whenever a salesman tells you of a tax credit or deduction for anything, is to consult your tax preparer to find out the truth. The solar tax credit is still a good deal, but only if you can afford the solar and can take full advantage of the credit.

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