by Andrew D. Schwartz, CPA, Founder of The MDTAXES Network
At some point during each tax season, there is a moment when I notice a recurring trend or theme that is unique and fascinating to that specific tax season. So what is this year’s most interesting trend?
For the 2017 tax season, what I found most fascinating is the number of clients who installed solar panels on their home during 2016. People who added solar property to their homes are eligible to claim a federal tax credit equal to 30% of the costs incurred.
Remember, a tax credit is a dollar-for-dollar reduction in the taxes you owe. Spending $40k on solar panels for your home, therefore, translates to a $12k reduction in the federal income taxes you’ll pay that year. You report this valuable tax break on a Form 5695.
Many states allow taxpayers to claim a solar tax credit as well. For example, Massachusetts allows a tax credit of up to $1,000 while New York allows up to $5,000 in tax savings for installing solar.
Please note that the solar credit has been extended through 2021. However, the full 30% tax credit applies only through 2019, then the credit decreases to 26% of eligible costs incurred for 2020, and then decreases again to 22% for 2021.
According to the Instructions of Form 5695:
Qualified solar electric property costs. Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. The home doesn’t have to be your main home.
Qualified solar water heating property costs. Qualified solar water heating property costs are costs for property to heat water for use in your home located in the United States if at least half of the energy used by the solar water heating property for such purpose is derived from the sun. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. To qualify for the credit, the property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which the property is installed. The home doesn’t have to be your main home.
Prior Year Trends:
Increase in the number of clients choosing to allocate $3 of their tax liability to the Presidential Election Campaign Fund
More clients had energy efficient tax credits for purchasing solar panels, electric cars and even re-charging stations for those electric cars
A variety of tax hikes took hold causing higher taxes on lower income for high-income taxpayers
Uptick in the number of individuals taking advantage of Health Savings Accounts (HSA)
Record low interest rates meant many homeowners refinanced their home mortgages