How the Federal Tax Credit Works
For many homeowners, going solar is a great opportunity to save on monthly energy bills and reduce your dependence on your utility. The federal tax credit for going solar can make this investment an even better deal.
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 an 8 kilowatt solar installation. So, in this example, the 26% federal tax credit could reduce your taxes by $7,800 – 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 for more information and before filing your solar federal tax credit.
Tax Credit Eligibility
To qualify for the solar federal tax credit, you must meet all of the following requirements:
- You must own your home (renters are excluded, unfortunately).
- Your Federal Tax liability must be sufficient to qualify for the 26% 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 Versus 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 have no tax liability, there is nothing to offset and you can’t take advantage of it). Tax rebates are payable to the taxpayer even if they pay no tax. While most people qualify for the federal tax credit, there are some who do not. Anyone who does not pay 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 pay enough taxes to take full advantage of this credit.
If you do incur sufficient federal tax liability in the year that you finance or purchase your system, then the credit can be applied toward the taxes you owe. If you already paid taxes by withholding them 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 can 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 $7,800 tax credit (26% of system costs). Through their employment they pay the government $7,800 in taxes, but this is withheld on their W-9 so they end up paying nothing when they file. In this example, when the federal tax credit is applied to the $0 balance they pay the government, they receive a tax REFUND of $7,800 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 incur $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 $7,800 tax credit is applied, they can only claim $4,500 of it because they only paid 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 the homeowner’s next year’s taxes. In this scenario, if Homeowner #2 pays the government at least $3,300 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 federal tax credit, visit our Solar Learning Center Article, Claiming the Federal Tax Credit.
Or to learn how to fill out the applicable IRS forms to claim your federal tax credit over two tax cycles, visit our Solar Learning Center article, Claiming the Federal Tax Credit Over Two Tax Cycles.
How do I Use the Tax Credit to Pay Down My Mosaic Loan?
Mosaic’s solar loan programs are built to be flexible, friendly and affordable – and, in the case of CHOICE loans, the monthly payments are specifically structured with the federal tax credit in mind. However, whether you opt for a CHOICE or a PLUS loan, you have the option of reducing your monthly loan payments by using your federal tax credit – or your own savings. Here’s how it works:
CHOICE: Mosaic’s CHOICE loan product is structured with the federal tax credit in mind, with lower monthly payments you can lock in by using the full amount of your credit. If you pay down your loan by an amount equal to your 26% federal tax credit within the first 18 months of your loan, you keep your original low monthly payment for the remainder of your loan. If you pay the principal down by less than 26% by month 18, your monthly payment goes up; if you pay down more than 26%, your monthly payment gets lowered even further. It’s your CHOICE!
PLUS: Mosaic’s PLUS loan product – which can be used to finance other home improvements, in addition to solar and batteries – has monthly payments that do not assume the use of the federal tax credit. If you opt to use either the tax credit or personal savings to make voluntary pre-payments to reduce your loan principal in the first 18 months, your monthly payments will be reduced for the remainder of the loan term – just like CHOICE. However, unlike CHOICE, if you choose to not make any extra pre-payments, your monthly payments will not increase.
Bottom line: In both the CHOICE and PLUS products, your decision of how much or whether to pay down will never change your interest rate, and there are never any prepayment penalties. 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.
* Availability of Federal & State Tax Credits is dependent on your unique financial situation. Please consult a tax professional regarding your eligibility.