There are several benefits that come with the installation of a solar panel system on your property, and solar tax incentives are some of the most notable. Both at the federal level and for various state and local agencies, there are several kinds of solar tax incentives that can help you recoup some of the up-front cost you've spent on solar panels, plus provide other financial value.

At Intermountain Wind & Solar, we're here to assist clients around Utah and Idaho with all their solar power needs, including important themes like solar financing and solar tax incentives. Using the federal solar tax credit, or Investment Tax Credit (ITC) as our example, here are some basics on how to file and maximize your savings and see financial benefits in addition to improved power rates.

What is the Federal Solar Tax Credit?

Before we dive into the specifics of how to file for the federal solar tax credit, let's first define what it is. The Federal Solar Tax Credit was established by Congress in 2005 as part of the Energy Policy Act and allows individuals and businesses to deduct a portion of their solar panel installation costs from their federal taxes.

It is currently equal to 30% of the total cost of your solar panels installed, including any equipment or labor costs associated with the installation. For example, if you spent $25,000 on your solar panel system, you would be able to claim a tax credit for $7,500 (26% of $25,000) when you file your taxes.

The Federal Solar Tax Credit, also known as the Investment Tax Credit (ITC), is one of the most significant incentives available for renewable energy systems in the United States. This credit allows you to deduct 30% of the total cost of your solar panel system from your federal taxes. For example, if it costs $10,000 for your solar system then you would get a $3,000 tax credit which would help reduce your tax bill. This credit applies to both residential and commercial properties and has no cap on its value.

How It Reduces Your Tax Bill:

• The tax credit is subtracted directly from your tax liability (the amount of taxes you owe), not your taxable income. So, if you owe $3,000 in taxes and qualify for a $3,000 ITC, your tax liability could be reduced to zero.
• If your tax liability is lower than your credit, you may not be able to use the full amount in that year. However, you can carry the remaining credit forward to future years. For example, if your tax bill is only $2,000, you would use that $2,000 of the credit and carry over the remaining $1,000 for the next year.

It's important to note, however, that this credit will eventually run out as well. It is set to begin phasing out in 2033, so the earlier you take advantage of it, the better.

Ask us to see if you qualify for these additional solar tax credits below:

• See if You Qualify for the Energy Community Bonus
• Covers up to an additional 10% of the cost of a solar installation, based on the business's location 
• Low Income Bonus
• Covers up to an additional 10% of the cost of a solar installation for entities in low-income areas 

Idaho Specific Tax Info:

Idaho offers a Residential Alternative Energy Tax Deduction that allows residents to deduct up to 40% of their solar installation costs from their personal income taxes for the first year only. After that first year, Idaho residents can also deduct an additional 20% of the cost each year for three years after installation. 

How it works:

• The deduction is available to all taxpaying residents of Idaho 
• The maximum deduction is $5,000 per year or $20,000 total 
• To claim the deduction, you can: 
  • Print out IRS form 5695 
  • Fill out the form using documentation from your installer 
  • Submit the completed form when you file your taxes

Our next few sections will go over the proper steps for filing this tax credit, plus some tips on maximizing your savings.

Determining Eligibility

First and foremost, you need to make sure you're eligible for the federal solar tax credit (or if you're looking at a different tax credit, determine eligibility for that). This credit is available to both residential and commercial properties, as long as they are owned by the taxpayer claiming the credit.

If you have a third-party ownership agreement, such as a lease or power purchase agreement (PPA), your solar provider will likely receive the tax credit instead of you. However, some states do allow for third-party owned systems to pass on the tax credit benefits to homeowners.

It's also important to know that if your federal tax liability is lower than the total  amount of ITC savings you'll be receiving, you can still use it by carrying over credits to the following year. This means you'll be able to take advantage of the full credit, even if it takes a couple years to do so.

Filing Your Taxes

When it comes time to file your taxes, there are a few important forms that must be filled out in order to claim your federal solar tax credit:

• Form 1040: This is where you report your personal income and deductions.
• Form 5695: This form is specifically for residential energy credits, including the solar tax credit. Here you will report your total expenses and calculate the credit amount owed to you.
• Instructions for Form 5695: These instructions provide additional information on filling out Form 5695, including specific lines to fill out and corresponding worksheets.

Entering Energy Efficiency Property Costs

Part of filling out Form 5695 is reporting the cost of your energy efficiency property, which includes your solar panels. You will need to report this cost on line 1 of the form.

It's important to note that only certain expenses are eligible for the credit, including:

• Solar panels
• Inverters
• Batteries used with a solar panel system
• Labor costs associated with installation

On top of these direct costs, you can also include indirect expenses such as engineering fees and permitting costs.

Determining Tax Liability

Next, you need to determine if you have enough tax liability to obtain the full 30% credit in a single year. This means you'll need to have completed the 1040 Form, which calculates your total tax liability for the year.

If your solar credit is higher than your tax liability, you can carry it over to the following year. However, if you have enough tax liability to cover the full credit amount, then you'll be able to claim it in one year and see a significant savings on your taxes.

Calculate Tax Credit

Using the information from Form 1040 and Form 5695, you can now calculate the total tax credit amount owed to you. This will be reported on your 1040 form as a nonrefundable credit.

As mentioned before, if your credit is higher than your tax liability for that year, it can be carried over to future years until fully utilized.

Maximizing Savings

As the federal solar tax credit is set to decrease over the next few years, it's important to act now and install your solar panel system in order to maximize your savings.

At Intermountain Wind & Solar, we can help you not only understand and take advantage of solar tax incentives like the federal solar tax credit, but also assist with financing options to make going solar even more affordable. Contact us today to learn more about how we can help you save money through solar financing and various solar tax incentives while reaping all the benefits of clean, renewable energy, whether you're in Utah or Idaho.