Solar Energy Credit

[Jenbird]

I am thinking about adding solar panels to my home. For $29,000 solar panels I should get a tax credit of $8500. I usually overpay in taxes and get about a $3000 refund. How would the tax credit impact this? Would it be better to change my tax status and not get a refund and then do the solar panels? 

[Critter-3 · Accepted solution]

 I usually overpay in taxes and get about a $3000 refund. How would the tax credit impact this?  What you "usually" get in a refund is immaterial ... the credit reduces your tax liability.  Depending on what "payments" you made to cover this tax liability will determine how much of a refund of that over withholding you will get.  So in theory your refund will go up because your tax bill went down but review your return to be sure.  Be very aware that contracts for solar can sometimes be written so that your credit needs to be used to reduce your payment but if you only have $4000 withheld then that is the most the refund can be for 2022 which is not the full amount of $8500 that you were told you would get ... it could take more than one tax year to use up the credit in full. 

Would it be better to change my tax status and not get a refund and then do the solar panels? That is totally up to you however if you change your withholding  and forget to change it back later  it could have unwanted consequenses in underwithholding penalties and owing the IRS.  

[Carl]

Look at line 24 of your 2021 form 1040. That is your total tax liability for the tax year.

Now look at line 33 of the form 1040 for tax year 2021. That is the total amount of taxes you paid during the year through W-2 withholding, quarterly tax payments, etc.  If the amount on line 33 is more than line 24, then you over paid your tax liability and the difference is refunded to you.

The solar tax credit affects your tax liability on line 24.  If your total possible tax credit for solar panels is $8000, but your tax liability is only $5000, the credit will only reduce your liability to zero - meaning that you will only get a $5000 credit. That's it. Not a penny more.

Now with some credits any "excess" you may qualify for can be carried forward to the next tax year. I do not know if the solar tax credit is carried forward. But if it's not, then the maximum credit you can possibly get, can not exceed your tax liability in the tax year you claim the credit.

[TomD8]

The solar tax credit is a nonrefundable tax credit, which means you will not get a tax refund for the amount of the tax credit that exceeds your tax liability. However, you can carry over any unused amount of the tax credit to the following tax year.

https://www.energy.gov/sites/default/files/2021/02/f82/Guide%20to%20Federal%20Tax%20Credit%20for%20R...