Does Child Tax Credit or Solar Tax Credit get applied first?

[talbach]

We just filed our 2020 taxes. We have several kids, and the child tax credit completely wiped out our tax liability, and then some. We are considering installing Solar panels in 2021 and have a potential tax credit of around $7,000. However, I learned that the federal solar/energy tax credit is nonrefundable (won't bring our tax liability below $0). So, my question is, is the child tax credit or solar tax credit applied first? 

It would be great if the solar tax credit was applied first, because then it could take our 2021 tax liability down to $0 effectively, and the refundable portion ($1,400) of the child tax credit would take us below $0. If the child tax credit is applied first, it would wipe out or tax liability, and bring us below $0, rendering the solar tax credit unusable.

So, again, my question is, is the child tax credit or solar tax credit applied first? Also, is my understanding about how the applicable scenario would play out correct?

[JohnW152 · Accepted solution]

Yes, you're understanding the scenario correctly.

The Child Tax Credit (CTC) is applied first.

CTC is claimed on line 19 of Form 1040.

The credit for qualified solar electric property is claimed on Form 5695, Residential Energy Credits, and carried over to Schedule 3, line 5.  This amount, and any other Schedule 3 Part I credits, is transferred to Form 1040, line 20.

Bear in mind that Residential Energy Credit can be carried forward if not used.  Please see the Instructions for Form 5695 for more information.

[talbach]

Thank you, I really appreciate it. The instructions seem to say the carry forward applies from 2019 to 2021. I assume this will be the case, unless the credit is renewed by Congress. Is that right? Or can we carry forward the credit indefinitely, until we are able to use it?

[JeffreyR77]

There is no confirmation available from the IRS yet that the carryforward is beyond 2021.

[talbach]

Very good to know, thank you!

[talbach]

Hello,

I did some more research and wanted to update the conversation. The answer to the original question is still correct. However, in my follow up question I asked about the carry forward for the Residential Energy Credit. It turns out I misinterpreted the Instructions for Form 5695 to mean the carry forward could only be used in 2021, and any unused credit amount would be lost. That is not accurate. The form is simply used to pull in last year's carry forward (if there is one), and note the amount carried forward to the next tax year (if there is any). Once the Residential Energy Credit is earned, it can be carried forward 20 years per this article. 

[mitchy02]

You should have received your $1,400 child tax credit under the Additional Child Tax Credit after your Solar Tax Credit. Was that not the case for you when you filed? I plan to do the same for my 2021 tax year with the CTC being fully refundable for the next two years.

[talbach]

We are installing solar this year, so I haven't gone through the tax process yet. However, per JeffreyR77 the Child Tax Credit is applied first. Although, what's the Additional Child Tax Credit?

[mitchy02]

While it's correct that it gets applied first the CTC is 100% refundable this year and next year. So I'm assuming the solar would still take in affect. I mocked it up in my 2020 filing and that seemed to be the case. 

The Additional CTC was the refundable part of the CTC. But because it's 100% now I don't believe that applies for the next two years.

I'm not a tax advisor but that's how I'm interpreting it.

[Critter-3]

The standard  ordering rules for the use of the credits on the form 1040  is that  non refundable credits are  used up first before refundable credits or ones that can be carried forward like the adoption & solar credits. 

For 2021 the CTC is fully refundable so it moves down on the ordering list to allow the solar credit to move up in the pecking order.  You cannot use the 2020 program to "what if" the 2021 return as it may not take this change of order into consideration.   Most of the 2021 forms/instructions have not yet been written/posted yet. 

[talbach]

This is all very good to know. Thank you 🙂

[Dna OKC]

Can you please explain what credit was applied in what order? Was the Solar credit applied then CTC or CTC then Solar?

[NCperson]

@Dna OKC -

what year are you asking about?  for most, it does not matter in 2021 because CTC is a non-refundable credit in 2021 and goes in a different place on the tax return than the solar credit - so the order doesn't matter. 

in 2022, CTC gets applied first, because it can not be carried over to the next year.  Solar gets applied last since it can be carried over to the next year.  

[Dna OKC]

Thank you, I was looking at 2022. I have Children and that covers my tax liability. We are looking at getting Solar and it has a 30% tax credit. So depending what applies first depends on if I can use the solar credit. 

[NCperson]

@Dna OKC - if you can't use all the Solar credit, it will carry over to the following year.

up to $500 for each child is considered 'non-refundable' and will be prioritized in front of the Solar credit.  Both of these credits can reduce Line 22 to as low as zero. 

the up to $1500 per child is a separate part of the CTC and you get it even if Line 22 is zero.