It seems like you can’t watch TV these days without being exposed to home solar ads touting free electricity and big tax credits. Be careful, as these savings and tax credits may not be all that they are advertised to be; this depends upon your financial and tax circumstances. Home solar is not necessarily the best option for everyone. Before you take the leap, please take a moment to consider the tax and financial aspects of solar electric systems as they apply to your circumstances. Once you’ve done so, you can make an educated decision.
Do You Really Need It?
Although nearly everyone wants to help the environment by reducing the use of fossil fuels, not every household uses enough electricity to warrant the expense of installing solar. Thus, the first step in your analysis should be to look at your annual electricity costs to see how long it will take for the projected savings to pay off the system. Be sure to also consider how many years you plan to stay in your present home, as if you expect to move soon, you likely won’t recover your costs before selling the home.
If you decide to install solar, shop around and do your research to find reliable contractors with good reputations. Get multiple quotes and compare them not only for cost, but also in terms of warranties, features, and kilowatt output.
This is one of the key issues that you need to carefully consider in making your decision. Systems typically cost $20,000 or more, and this depends on the home’s size and electricity needs. If you plan on financing the system, you need to be very conscious of loan interest rates, which can substantially impact the overall cost.
CAUTION: Some municipalities have set up programs through which the loan for the purchase of a solar electric system is added as a lien on the home; the payments are then made along with property tax payments. Unfortunately, the interest rates for these programs are generally substantially higher than the rates for other sources. All too frequently, the borrowers are led to believe that the payments are deductible as property taxes, but, in fact, only the interest portion of the payments are deductible as home mortgage interest.
Solar Tax Credit
As an incentive to persuade homeowners to install solar electric systems in their homes, the federal government offers a tax credit equal to 30% of the cost of solar installation (if for a primary or secondary home). However, the credit is nonrefundable, which means that it can only be used to offset tax liability; any amount of credit that is not used in the current year carries forward, however. Depending upon your circumstances, you may not even derive a meaningful benefit from the credit. Line 47 on the 1040 tax form represents your tax liability for the year, and the solar tax credit can only be used to offset that amount. In addition, the solar credit is being phased out; the credit on new installations drops to 26% in 2019 and 22% in 2021, the last year of the credit.
Another issue is that the credit is not allowed if you lease a solar electric system instead of purchasing it.
Because the addition of a solar electric system would be treated as a home improvement, if your loan to finance a system is secured by your home, the interest is deductible as home mortgage acquisition interest— provided that you itemize your deductions and that the sum of all your primary and secondary home acquisition debt does not exceed $1 million.
The final issue is whether you can actually afford the solar electric system. Is it worth having one after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit? Before committing to purchase a solar electric system, make sure it’s the right solution for you. If you have questions or need assistance, contact the Experts at Henssler Financial: