Purchasing Solar panels

[Tdem]

Hello, we are looking to purchase solar panels.  We normally get a small federal refund - $600- $1000.  We will be able to recoup any of the tax credits?  it is better to spread it out over many years?

[NateTheGrEAt]

Hi @Tdem - 

Thanks for your question today!

Be aware that the credits for installing Solar panels are a nonrefundable credit. This means you can only use the amount up to your tax liability (less other nonrefundable credits, if any) for the year. 

The information you gave about a small federal refund unfortunately doesn't get to the question of what your tax liability is. Your refund is the amount of overpayment towards your tax liability. So take these examples of two very different taxpayers who both get a $600 refund:

Taxpayer 1 - $5,000 taxable income, $0 tax liability, $600 withholding -> $600 refund

Taxpayer 2 - $500,000 taxable income, $200,000 tax liability, $200,600 withholding -> $600 refund

As you can see, there's a big difference. I don't know what your tax liability is in a typical year, but you can look at Line 22 on your 2021 Form 1040 to see what it was for 2021. 

So, anyway, back to the credit. Whatever amount is above your tax liability for the year will be carried forward to the next year. If you don't have the tax liability that year, it'll be carried forward again. Keep in mind that if you don't use the entire credit by the time the program is scheduled to end - currently 2034 unless extended - the remainder would be lost. 

It is prudent of you to research this info now and to be sure you will have enough tax liability to benefit from the credit before undertaking a solar project, and not rely on what the salespeople may be telling you. 

Here's a great TurboTax article about solar credits. 

I hope this is helpful! Good luck on the project. 

[Tdem]

Thank you   that is helpful

It looks like it has been $22,000 to $24,000 the last two years 

[Tdem]

Would it help to change our deductions from our payroll throughout the year to offset that?

again line 22 has been $22-24,000 the last two years.

[NateTheGrEAt]

It sounds like you probably have enough tax liability to absorb the entire solar credit for most normal sized solar systems within one year, so that's great. 

If you adjust your withholding this could allow you to receive the credit in the form of larger paychecks during the year rather than waiting to receive it as a lump sum. 

However, if you do this, be sure to change it back to normal at the end of the year so you don't under-withhold the following year. Also, be aware that most state withholding follows federal withholding, so if you're in a state that has a state income tax, this could cause you to under-withhold on state. (Since credit is only a federal credit). You might need to make state estimated tax payments to ensure you don't end up with a large state balance due.