How does the Federal Solar Tax Credit work?
Solar adoption is skyrocketing, thanks to plummeting solar panel prices that enable homeowners to save money. For the first time, homeowners can control their electricity costs by going solar instead of being at the mercy of ever-rising utility rates. And through the end of 2019, going solar is extra appealing thanks to the federal Residential Renewable Energy Tax Credit, which can be worth up to 30% of the total cost of your solar installation! Under current law, the 30% tax incentive will remain in effect through December 31, 2019. After that, it will drop down to 26% for 2020, 22% for 2021, and to zero after 2023.
(Learn just how much these savings could mean to you with a free quote from Mosaic!)
A tax credit is a reduction in the amount of taxes you owe. The typical homeowner that goes solar with Mosaic pays about $30,000 for a 7 kilowatt solar installation. So, in this example, the 30% federal tax credit could reduce your taxes by $9,000 – quite a nice bonus! Taking advantage of this credit is easy as A-B-C, if you know the eligibility requirements and how to claim it.
KEEP IN MIND: We’re solar people, not tax people, so we don’t give tax advice. Anything you read on this page is merely an example and may not be appropriate for your unique financial situation. Not everyone will be eligible, so please consult a tax professional before filing your tax credit.
Tax Credit Eligibility
To qualify for the 30% federal Residential Renewable Energy Tax Credit, you must meet all of the following requirements:
- Your system must be installed by December 31, 2019.
- You must own your home (renters are excluded, unfortunately).
- You must pay enough taxes to the Federal Government to qualify for the 30% tax credit.
- You must own your solar panels.
This last point isn’t quite as obvious as it might seem, since many homeowners today actually lease their solar systems through third party companies. While leasing may make sense in some situations, it means that the leasing company gets to claim the tax credit instead of you! By contrast, homeowners that buy their panels outright or finance them with a loan (from Mosaic, for example) do get to claim the tax credit.
Tax Credit vs. Rebate
It’s important to understand that this is a tax credit and not a rebate. Tax credits offset the balance of tax due to the government (therefore, if you owe no tax, there is nothing to offset and you can't take advantage of it). Tax rebates are payable to the taxpayer even if they owe no tax. While most people qualify for the solar tax credit, there are some who do not. Anyone who does not owe federal income taxes will not be able to benefit from the tax credit. And, if you’re on a fixed income, retired, or only worked part of the year, you may not owe enough taxes to take full advantage of this credit.
If you do owe sufficient federal taxes the year that you finance or purchase your system, then the credit can be applied to pay off the taxes owed. If you already paid that taxes by withholding it from your paycheck, the federal government will apply the tax credit to a tax refund. This refund can be used to pay down the balance on a Mosaic loan. It’s important to note that the tax credit be carried forward one year, which means that you can use any remainder from this year as a credit towards next year’s taxes.
Homeowner #1 buys a $30,000 solar system, meaning they are eligible for a $9,000 tax credit (30% of system costs). Through their employment they owe the government $9,000 in taxes, but this is withheld on their W-9 so they end up owing nothing when they file. In this example, when the solar tax credit is applied to the $0 balance they owe the government, they receive a tax REFUND of $9,000 that they can then apply to their Mosaic loan - or keep if they choose.
Homeowner #2 also buys a $30,000 solar system but they only owe the federal government $4,500 in taxes because they were on a fixed income. This customer did not withhold any money from their paychecks and owes the full $4,500 when they file. When the $9,000 tax credit is applied, they can only claim $4,500 of it because they only owed that much in taxes. In this example, the customer does not have to pay any taxes that year but they also will not receive a refund check from the IRS.
The upside is that any remaining tax credit can be carried forward and applied to next year’s taxes. In this scenario, if Homeowner #2 owes the government at least $4,500 in taxes for the following year, they can utilize the rest of the credit.
To learn how to fill out the applicable IRS forms to claim your Solar Investment Tax Credit, visit our Solar Learning Center Article, Claiming the Solar Investment Tax Credit.
Or to learn how to fill out the applicable IRS forms to claim your Residential Renewable Energy Tax Credit over two tax cycles, visit our Solar Learning Center article, Claiming the Solar Investment Tax Credit Over Two Tax Cycles.
How do I use the tax credit to pay down my Mosaic loan?
Mosaic’s loan is built to be flexible, friendly and affordable. It’s structured so that if you use your federal solar tax credit or other savings to pay down your loan balance by 30% within 18 months, you’ll lock in a low monthly payment for the duration of the loan.
Here’s how it works: For the first 18 months of your loan, your monthly loan payment will be the amount quoted to you in your loan agreement. After 18 months, Mosaic readjusts your monthly loan payment depending on what percentage of the loan you paid down.
Here’s how the adjustment works:
If you make the whole 30% payment by month 18, you will lock in the low monthly payment you started with. If you paydown less than 30%, your monthly payments will go up after month 18. If you paydown more than 30%, your monthly payments will go down after month 18. It's your choice!
Bottom line: Regardless of how much you pay down, your interest rate will never change, and you will never have to pay more than your total loan amount (unless you incur late payment fees). We highly recommend that you consult a tax advisor about your personal federal tax credit eligibility to determine if you can take advantage of the tax credit and apply it to your loan.
We also have a wonderful customer support team waiting to answer any additional questions you may have.