30% Solar Credit for 2019 Not Applied in Full

[TurrboDummy]

1. My wife and I are both-self employed and file taxes jointly.
2. We almost always owe substantial money at the end of every tax season.
3. We spent around $39k on a solar system in 2019.
4. However when I filled the taxes in wrote deductions (not including the solar), we owe around $10K federal (just giving a general number for privacy reasons.)
5. If I add in the solar system for the credit, it only applies $186 (which could be from a previous year window installation—not entirely sure.)
6. The tax software says that the ~$11,800 (I’m assuming for the solar) will be carried over to next year’s taxes (2020.)
7. Is the carryover to be expected or is there a mistake with the software? Perhaps I’m incorrect, but I thought that the 2019 purchase and installation of the solar system should be applied to 2019 taxes and any remaining ($11,800 - $10,000 = $1,800) would be carried over to the following year (2020.)

[AmeliesUncle]

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@TurrboDummy wrote:

1. My wife and I are both-self employed and file taxes jointly.
2. Is the carryover to be expected or is there a mistake with the software? Perhaps I’m incorrect, but I thought that the 2019 purchase and installation of the solar system should be applied to 2019 taxes and any remaining ($11,800 - $10,000 = $1,800) would be carried over to the following year (2020.)

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The credit is applied against INCOME tax (see Line 12a of your Form 1040).  It can not be applied against other taxes such as Self Employment Tax (Social Security and Medicare taxes).

Does that solve the situation?

[TurrboDummy]

Okay. Thank you very much for taking the time to reply. It’s really appreciated. I think (please see my username) your response makes sense although admittedly I get confused especially with a post-COVID-19 brain fog I’m struggling with. My trust in accountants is low seeing that I had one really screw me up ages ago and the last two we hired forgot to charge us for their services...

I incorrectly assumed (at a negative immediate cost to ourselves) that since I worked from home and file 1099-misc that this would apply as a credit towards our overall liability (all-in-one), not realizing that the IRS perspective would separate the two (self-employment/SS/Medicare taxes from income tax.) I suppose we wouldn’t owe income taxes for the next few years unless the government make some changes to the energy credit.

[AmeliesUncle]

Yeah, that is something that is easy to miss.  But the carryforward does last for 5 years [see correction in comments below]  so hopefully you will be able to use it up by then.

In event you have any Traditional IRAs or a 401k from a former employer, you may consider converting it to a Roth IRA.  That would be taxable, but the solar credit would offset that.

[TurrboDummy]

I thought the length of the carryover periods for the Energy Credits haven’t been determined.

according to this article, it extends out to 20 years and actually 1 year back:

https://recsolar.com/blogs/calculate-solar-tax-credit-2020/ 

Do you think if we were to sell some stock next year if that will offset it?

I also wonder if any of this could also apply to any back taxes owed (one accountant royally messed me up ages ago when I first started my business and it’s well past the amendment period...) but I’m not holding my breath. 

[Critter]

Increasing your income to increase your federal taxes is a good way to use up the solar credit  and no, it cannot be used against old debts. 

[AmeliesUncle]

You are correct, there is no limit to the carryforward (I was wondering if I was right as I was originally typing 5 years).  However, that article you posted is about the ITC which is for businesses, not for your personal home.  There is no carryback or stated limit for the carryforward for the solar credit for your personal home.

For the stock, yes, *IF* that sale of stock were to cause you to owe income tax, the solar credit would offset it.   However, with your lower income, the long-term capital gain may be taxed at 0% anyways.

No, the credit can not be applied to past taxes.  Sorry.