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Article filed under Energy, Energy Self-Reliant States

Federal Solar Tax Credits Rule Out Half of Americans

| Written by John Farrell | 6 Comments | Updated on Jan 11, 2011 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/federal-solar-tax-credits-rule-out-half-americans/

The difference between clean energy policies with a democratizing influence and the bewildering U.S. system can be illustrated with a close look at the federal investment tax credit for solar power.  The investment tax credit returns up to 30% of a solar PV system value to the developer, and the credit can be carried over for 5 years (until 2016, when the entire tax credit may expire as it has in the past).

Unfortunately, many of the institutions and individuals that could invest in solar power are not able to use the credit simply because it’s based in the tax code.

For the moment, we’ll leave out the obvious non-taxable entities like schools, nonprofits, governments and focus just on the impact of the federal solar incentive on residential solar.  A large portion of the thousand of megawatts of solar being installed in California, Colorado, and other large solar markets is going on home rooftops.

A typical residential solar PV array is around 5 kilowatts (kW), with a cost of $41,000 ($8.20 per Watt), so the federal tax credit has a maximum value of $12,300.

A family of four in the U.S. with the median family income of $44,000 has an estimated tax burden of $2,000 and would require just over 6 years to successfully absorb the tax credit on a 5 kW residential solar array.  But tax law only gives them 5 years to use the credit (and the credit may expire again in 2016, as federal renewable energy incentives have in the past).

The picture is only worse for those families with lower income (and tax liability), effectively ruling out half of Americans from using the solar tax credit.

Filling status makes little difference, with slightly more than half of individual filers able to use the full federal tax credit than married, joint filers.  (note: the tax estimations assumed that the family of four would claim zero exemptions but any deductions or credits associated with having two children).

Ultimately, a great number of Americans are not able to finance solar projects economically simply because the incentive is based in the tax code.

To be fair, a significant drop in the price of solar PV (from $8.20 to $5.00 per Watt, for example) could increase the number of Americans who could capture the full credit for a given system size (reducing the non-participants to 45% of Americans), but the tax credit still leaves out millions of potential individual solar investors.

And of course, schools, cities, and nonprofits have always been left out entirely.

In contrast, incentive schemes that don’t depend on tax credits (such as production payments) can be used by anyone.  Yet another reason the U.S. should reconsider using the tax code for its renewable energy incentives.

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About John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power. More

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  • CraigOlsen

    “A family of four in the U.S. with the median family income of $44,000 has an estimated tax burden of $2,000”? You’re kidding, right? That’s only 4.5%! Any new income I generate is taxed at over 50%. I was able to fully credit my system out the year it went into service without a hiccup.

    • Craig,

      You’d be surprised. Although the top marginal tax rate is around 40%, the tax rates on lower income Americans are quite a bit lower ( http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Marginal_tax_rates). For families, tax credits and deductions for dependents also lower the effective tax rate.

      • David Willey

        In the website energy.gov on the Residential Renewable Tax Credit tab, it states the credit is extended to the 2016 tax season, to December 31, 2016, but it remarks “it is unclear if any remain balance will extend thru that year” how can it be unclear? and is this a decision that will be made at a later time by the fed?

        • Dan L

          I am in the Process of Going Solar now (October 2015) and will not be operational until early 2016… I want to purchase the Solar Panels instead of leasing mainly because of this 30% Tax Credit… The problem I have is that I will need two years (2016 and 2017) , maybe 3, to receive the full 30% credit… The IRS needs to clear up this debate on weather folks can carryover their unused credit beyond the year 2016 or not… IMO, even if they don’t extend the credit, they should at least honor the credits for folks that are Carrying over from previous years… Think about it, hundreds of thousands of home owners are in the same boat already and many more thousands are in the same situation as me… Come on IRS!!!!!! We need to know NOW one way or another!!!!

  • Barry

    We installed a residential 7kW system 5 years ago, which gave us a $15,000 tax credit. As you described I’ve been using some of it every year and still have $6,000. to use. Is there any way of extending my tax credit beyond 2016? Or if new credits were made available beyond 2016 would that also mean I could continue to roll mine over into future years? I really hate to loose this. I already converted my regular IRA to a Roth IRA in order to increase my income and make use of the $7,500 federal tax credit I got from purchasing an electric car. That tax credit needed to be fully used in the tax year the car was purchased.

  • reefseeker

    15.040 kW DC Power (STC) / 13.392 kW AC Power (CEC) for 45k… so if you are paying 41k for 5k you are getting robbed. FYI I am in California