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Here's how to take advantage of the solar tax credit extension in 2021

Get all the details on the US government's tax credit for residential solar panels.

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If you're thinking about installing solar panels, you may have heard of the solar Investment Tax Credit, also called the federal solar tax credit. The current federal solar tax credit guidelines were extended through 2022 when former President Donald Trump signed the Consolidated Appropriations Act, 2021 this past December. That's good news for anyone interested in getting a residential solar panel set up in the next couple years at the same 26% tax credit as 2020. 

Burning coal, oil and natural gas for heat and electricity accounts for roughly 75% of US greenhouse gas emissions. These pollutants contribute to rising global temperatures and sea levels, changes in weather patterns and other factors associated with climate change

Renewable alternatives, such as geothermal energy, wind power and solar power, reduce the footprint caused by these fossil fuels. Various incentives exist in the US for commercial and residential use of renewable energy, including the federal solar tax credit. President Joe Biden has already signaled strong interest in environmental issues by rejoining the Paris Climate Agreement on his first day in office. That suggests the 26% federal solar tax credit might be extended beyond its current deadline at the end of 2022, but the Biden administration hasn't made any changes to the federal solar tax credit (yet). 

Read on to learn how to take advantage of this tax credit.  

See more: One Kentucky coal company is transforming two old mining sites into a massive solar farm

A brief history

The Energy Policy Act of 2005 marked the beginning of the federal solar tax credit when it was signed into law by then President George W. Bush. The first of the 550-page document describes the goal of the act: "To ensure jobs for our future with secure, affordable, and reliable energy." It details a number of ways in which the US government seeks to address the energy challenges in the US, including providing tax incentives for "residential energy efficient property."  

Here's an excerpt:

SEC. 25D. RESIDENTIAL ENERGY EFFICIENT PROPERTY. ''(a) ALLOWANCE OF CREDIT.—In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of— ''(1) 30 percent of the qualified photovoltaic property expenditures made by the taxpayer during such year, ''(2) 30 percent of the qualified solar water heating property expenditures made by the taxpayer during such year..."

In short, it applies a dollar-for-dollar decrease to the income tax you owe (for a percentage of the cost). The federal solar tax credit was originally set to expire at the end of 2007, but it's been renewed many times. The initial 30% reduction quoted in the original act lasted through 2019 but has since morphed into a phased-out approach with the percentage decreasing steadily before the credit eventually expires. 

The Energy Policy Act of 2005 goes on to outline eligibility for the credit, but this much shorter federal solar tax credit summary has all of key details without you having to sift though the entire text of the act. Note that the summary hasn't been updated with the latest tax credit extension dates, but the details on who qualifies remain the same.

The summary spells out who is eligible in detail, but here are the basic requirements:

  • Your solar system must be installed in the calendar year the tax credit is active 
  • The system must be located in the US at a primary or secondary residence
  • You must be the owner of the system, having either paid with cash or through financing 
  • The solar system has never been installed or used before 

The federal solar tax credit percentage dropped to 26% in 2020 and was scheduled to drop to 22% this year before expiring in 2022. Instead, Trump renewed the tax credit at its current level for two more years when he signed the Consolidated Appropriations Act, 2021 in December 2020. 

The tax credit today 

The Consolidated Appropriations Act, 2021 extended the 26% tax credit through 2022. It will drop to 22% in 2023 and expire at the end of 2023. 

For example, if you pay $14,000 for a solar panel system in 2021 (or in 2020 or 2022, for that matter), you'd be eligible for a $3,640 tax credit. Keep in mind that any other incentives provided by your state or utility company aren't included in the total. So if you receive $4,000 in state or utility incentives, only $10,000 of the original $14,000 cost could be applied to the federal solar tax credit, taking the total tax credit down to $2,600. 

The good news is that you can buy solar panels with the expectation that you'll get a decent reduction in your taxes. We'll continue to track this tax credit over time and provide updates if any of the current provisions are extended beyond 2022 -- or change completely. The deal may be renewed yet again, but with the current step-down plan in the new law, if you don't take advantage of the 26% tax credit, you'll get less money back if you buy solar panels after 2022. 

Find out more about state and other solar incentives here.

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