ITC for Solar Installation

[jmurphy-ectisp-n]

If I receive the ITC for Solar and my tax liability for 2022 is $5000 but I've paid in $10,000 will the ITC apply against the $5000 liability and I would receive a $10,000?  Or will the IRS take the remaining $15,000 ITC and automatically apply it to my $15,000 2019 Installment Agreement, still resulting in my receiving that $10,000 refund?

[Opus 17]

The IRS will always apply any tax refund to a previous tax debt before paying anything to you.

The solar tax credit is non-refundable, it can reduce your tax, but not more than your tax liability.  Normally, if your tax liability was $5000 and you paid $10,000 into the system by payments or withholding, you would get a $5000 refund.  If you apply for the solar credit in an amount of $5000 or more, the solar credit will reduce your tax liability (possibly down to zero) and you would get the entire $10,000 you paid into the system as your refund.  The maximum solar credit is 24% of your cost, but you will never get more than your tax liability.  So if you installed a $50,000 solar system with a possible credit of $12,000, but your tax liability is $5,000, your credit will be $5,000.

Also note the solar credit is not applied against self-employment tax, only income tax.

Then, in your case, if you are expecting a $10,000 refund but you have a payment plan from a past tax debt, the IRS will apply the $10,000 toward your past due amount.  It won't recalculate the amount of future payments you owe but it will reduce the number of payments you have to make.  If the past tax debt is paid off, you will get whatever is left.

[NCperson]

not sure I follow how you are using the terminology - the tax credit for solar can't reduce Line 22 below zero... please look at your Form 1040. 

so if your TAX (line 16) is $5000, then the solar credit for 2021 can't exceed $5000 (line 20) because Line 22 can't go below zero. 

if your tax credit for solar is $15,000 and you just used $5000, the rest will defer to see if can be used for 2022

when you state you "paid in $10,000" - what does that mean? you made estimated payments against your tax due? 

[jmurphy-ectisp-n]

The ITC for solar installation can be applied to any tax liability - current or past  So the question is will the ITC be applied to my 2022 tax liability of $5,000 and then to my 2019 tax liability of $16, 000leaving me with no tax liability.  If I made 401K withdrawals then there were taxes withheld to cover tax liability and now ITC has paid that tax liability won't I get back what I paid in ($10,000) for the 401k withdrawals?

[Opus 17]

@jmurphy-ectisp-n 

The residential property tax credit for a solar system is calculated based on the current year‘s income and taxes only.  Each year‘s tax return is entirely separate and self-contained from every year before and every year after. In my example, if you were entitled to a $12,000 credit but you only had a $5000 liability, the $7000 does not flow backwards to any previous tax debts. The maximum credit you can get in the current year is whatever your tax liability is for that current year. 

Now let’s make sure we understand what a tax liability is.  Your tax liability is the money you owe to the government for the whole year based on your income and deductions, and regardless of any payments or withholding.  It’s shown on line 22 of your tax return but let’s think about it another way:

suppose you had withholding and payments of $5000 and you got a $1000 refund. That would mean that your tax liability was $4000. Or, suppose that you had withholding and payments of $5000 and you owed $2000 when you file your tax return. That means that your tax liability for that year was $7000.

If you withdraw money from a 401(k), your tax liability goes up, regardless of whether you had withholding to cover it. If you withdrew $10,000, you would owe about $2200 more in income tax. If you had $2000 of withholding, you would owe an additional $200 payment when you file your tax return, but your liability was still increased by $2200.

If you are planning to install a solar system in 2022, it is a very good time to do some tax planning.  For example, suppose you plan to install a $30,000 system, which would give you a maximum credit of $7200. If you expected that your tax liability would be $5000, and that is the maximum credit you can get.  The other $2200 is lost forever. Since your maximum eligible credit is $7200, you could withdraw $10,000 from your IRA and it would be tax-free, because the extra tax liability would use up the remaining solar credit. 

But the leftover solar credit is only calculated on your current tax return and it never flows back to a previous tax debt.

I still don’t quite understand what you’re asking, but hopefully these explanations will clarify so you can ask the right questions, or so that you can give us some specific numbers of what you plan to do and what you owe from the past and what your current income is, and we could make some more suggestions. Or, you may want to see a tax professional before it is too late. 

[jmurphy-ectisp-n]

The Solar ITC clearly states that it shall be applied to any current or past tax liability so it would appear that the IRS will apply it as it does any refund to the installment agreement.

[Opus 17]

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@jmurphy-ectisp-n wrote:

The Solar ITC clearly states that it shall be applied to any current or past tax liability so it would appear that the IRS will apply it as it does any refund to the installment agreement.

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No, it doesn't.   Where do you see that?  For one thing, there's no way to calculate it on the tax forms. 

I did make one mistake above, if you are not able to use the entire credit in the year you claim it, the unused credit will carry forward to next year.  It is not lost.  Now, that means that it can eventually be applied to your tax debt, if you still have one, but only 1 year at a time going forward, it is never retroactive.  In each future year, the leftover credit will be compared to your tax liability, any eligible amount will be applied, and any unused amount will carry forward.  And if that results in a refund, the IRS will keep the refund and apply it to your installment plan.  But the credit is always limited by your current year tax liability, the carryover is calculated forward only, not backward. 

Or go your own way, you'll learn in the end.  

[NCperson]

@Opus 17 @jmurphy-ectisp-n - i've enjoyed reading this thread..... 

please note the instructions for the energy credit and specifically the instructions for Line 16.. it states the unused credit can be carried foreward to 2022; it does not state it can be carried back. 

https://www.irs.gov/pub/irs-pdf/i5695.pdf

Line 16
If you can't use all of the credit because of the tax liability limit (that is, line 14 is less than line 13), you can  carry the unused portion of the credit to 2022.

[AmeliesUncle]

I just wanted to clarify something:

While a I suppose the phrase ITC (Investment Tax Credit), could maybe used for both, generally it is only used in reference for the energy credit you get for business property (including rental property).  The rules for that allow a carryback of up to ONE year if it can not be fully used on the current return, and then any excess is carried forward.  But it would not apply to any tax due from more than one year ago.

Generally the energy credit for your personal home is called the "Residential Energy Efficient Property Credit", and there is no carryback for that.  Any unused excess credit is only carried forward to future tax returns.