To get the quickest pay back on your solar system you will want to take full advantage of any tax credits available. I’ve outlined the basics about the personal Federal and State Solar tax credits available to North Carolinians and noted a few things that are often overlooked. Understanding these rules and knowing your personal tax situation will help you determine what sized solar system is right for your home.
The federal government offers a tax credit of 30% of your solar PV or solar hot water system’s total installed cost. This is part of the Residential Renewable Energy Tax Credit enacted in 2006. To apply for this credit you have to fill out IRS form 5695. Visit for www.irs.gov for instructions. This credit is currently uncapped so there is no stated limit on how much you can get back. It is not uncommon for a home owner to claim a $6,000 -$12,000 credit on a residential system. Your only personal limit is how much federal tax you pay over the course of the year. For example you could not get a $10,000 federal tax credit if you only payed $5,000 to the fed. However, the Fed gives you 2 years to claim the credit. So following the previous example one could claim a $10,000 credit by breaking it up over 2 years if he pays $5,000 annual in federal taxes. You will not want to apply for a tax credit that is more than you can claim over 2 years. Another important fact is that the law specifies it must be installed on the owner’s primary residence. So forget putting it on your vacation home. The tax credit is available for solar PV systems, solar hot water systems for domestic or space heating use but not pool heating.
In North Carolina you can also claim a state tax credit of 35% of the total installed cost of the system. This is part of the NC Renewable Energy Tax Credit enacted in 1977. To apply you will have to fill out form NC-478G.
This tax credit is capped for PV systems at $10,500 and $1,400 for solar hot water systems. So a total investment of $30,000 for a PV system will reach your cap. Anything you pay above $30k you will not get any more of a state tax credit. The PV and hot water credits are considered separate credits so you can claim them both. The state tax credit is similar to the federal tax credit with two major exceptions. First of all, the law states that you cannot claim more than 50% of your state tax liability in any given year. So if you wanted to get a $10,000 dollar tax credit you would have had to pay $20,000 in year number one to get it all in that year. Most people don’t pay that much in state income tax so it is likely you will need to roll it into the following years. Which leads to the second big difference, you have 5 years to claim the state tax credit. So if I wanted to claim a state tax credit of $10,000 but normally only paid $5000 in state income tax a year I could claim a tax credit of $2,500 per year and it would take me 4 years to entirely recoup my tax credit.
Go to The DORNC website for more information on the state tax credit.
*It’s also important to note that any money received in the form of a state tax credit is considered “taxable income” by the federal government. So you will have to give Uncle Sam his share.
Let’s go through a simplified example. *Keep in mind I am not your tax accountant people! You should speak to a tax professional for your personal tax advice!
For simplicity sake let’s say I earned in the neighborhood of $60,000 last year. I went through my W2’s and saw I paid $12,300 to the fed and $4500 to the state because state taxes are lower. Let’s say I expected to make the same income and pay the same amount of tax in future years. I want to buy a solar system but I want to know A.) How much a can I spend and still take full advantage of the tax credits? B.) How long it will take for me to get all my tax credits back?
A quick glance will show that the state tax credit is the lower number and I can only claim 50% of that per year over 5 years. So the max I can claim from the state is $4,500 /2 = $2250 per year. I have 5 years to roll it into so is it possible to reach the cap of $10,500? Yes, I can get $2,250 *5 years= $11,250. I won’t reach my cap until the 5th year with my current tax situation.
Let’s say the solar system I want to get is $25,000 installed cost. My solar installer tells me I can get 30% back from the fed ($7500) and 35% back from the state ($8750). In my current tax situation I would be eligible to get all my federal tax credit back in the first year and it would take 4 years to entirely recoup my state tax credit. Remember to keep in mind every year I claim a state tax credit it is considered taxable income and I have to pay some federal tax on it.
This is a very simplified example but it should give you some basic knowledge to build upon. Understanding these rules and knowing how much you pay in state and federal income tax per year will help you decide what size of a solar investment is right for you. You may live in an area where there are added rebates. Check with your local utility to see if they offer any. Progress Energy is the only one I know of in NC currently offering a rebate.
On a final note you may have already noticed that incenting the solar economy by providing tax credits while very important is inherently biased. Certain groups of people are automatically excluded and cannot take part in any solar incentives! This includes the poor and people with little or no tax liability like retirees. I’ve met with dozens of senior citizens who wanted solar but just couldn’t justify it because the fact that they could not get a tax credit on it made it unaffordable and they would likely be dead before the system paid itself off. Other non-profit organizations like schools, churches, habitat for humanity all stand to benefit greatly from solar and would love to do it but find with-out the added benefit of tax credits a hard pill to swallow. It would be nice if there was a program which could include these people some day.