tax credit question

[halfmonkey]

Hi all. This is my first post as we're currently looking into going solar so I'm sure I'll be posting more questions as they come up. We're just starting to look into going solar and one of my questions is regarding the tax credit. I was able to find some information but not answers to my specific questions so I'll try here.

1. As I understand it, the tax credit is not the same as a rebate or deduction so please correct me if I'm wrong. As an example, if you have a system that costs $30k with an available tax credit of say $7k, does that mean that I'm truly only able to take advantage of this tax credit if my tax return says that I owe the federal government money? If so, then would I be correct to say that if as an example, I owe $8k and I have a tax credit of $7k, I can apply that $7k credit towards my tax bill and then write a check for the difference of $1k?

2. If my above example is accurate but let's say my tax bill actually comes in less than my tax credit so let's say it's only $5k. Do I use my $7k tax credit to cover my tax bill and then if so, can I roll the remaining tax credit of $2k to future years?

3. What if I don't have to pay the federal government once my filing is complete? Let's say instead, I'm receiving both a state and federal tax refund. What happens then? Do I just hang on to the $7k tax credit and see if I can apply it for the following year's tax return?

4. Am I able to apply the tax credit to other tax obligations such as property tax?

I'm sure I'm not asking all of the right questions so if I'm missing anything or if there's anything you can, please feel free to do so as I would really appreciate all of your help as we're trying to go solar. Thanks in advance.

[inetdog]

1. As I understand it, the tax credit is not the same as a rebate or deduction so please correct me if I'm wrong. As an example, if you have a system that costs $30k with an available tax credit of say $7k, does that mean that I'm truly only able to take advantage of this tax credit if my tax return says that I owe the federal government money? If so, then would I be correct to say that if as an example, I owe $8k and I have a tax credit of $7k, I can apply that $7k credit towards my tax bill and then write a check for the difference of $1k?

A common misunderstanding is just what the difference is between owing taxes and having to make a tax payment when you file your return.
A tax credit goes against your calculated tax burden after all of the deductions and exemptions are applied and then the tax tables or formulas are applied to your resulting income.
If your calculated tax burden is $10K and you had $9000 withheld from your income or from taxable withdrawals or sales profits or whatever, then you will need to make a payment to IRS of $1000 along with your return. But if you have a tax credit of $7K, then it will reduce your tax burden by that amount, leaving $3K as your total taxes. Since you have already made payments in the amount of $9K, you will get a refund of $6000 instead of sending a check for $1K. That difference is your $7K credit. This tax credit is not of the special kind which will result in a payment to you if you have no tax burden in the first place, so you will have to carry forward any excess of the credit over your tax burden. If you do not have any taxable income, then the credit cannot be used that year.

A tax deduction/exemption, on the other hand, goes to reduce your income by some amount. And if only part of that reduces your income below the point where any taxes would apply, then any additional deductions will do you no good, although in some limited cases they can be carried forward to another year.

[MGE]

Yes the Tax Credit (Federal Tax Credit) is money in your pocket when time to file taxes. Here's my example my system cost me 19k, Federal tax credit is 30% so that would be $5,700.00 deducted from my final tax calculations. Say that was 3k that I owed after deductions etc, The 5.7 k would apply and I would get a check for the 2.7k when I file. As Inetdog said a DEDUCTION could be spread out over multiple years (amortized) but a credit applies to that specific year. Hope this helps.

[Volusiano]

As Inetdog said a DEDUCTION could be spread out over multiple years (amortized) but a credit applies to that specific year.

I believe the solar tax credit can be carried forward until 2016. For example, if your 30% is $8K and your tax liability for 2013 is only $5K, then you can claim $5K tax credit for 2013 and the remaining $3K tax credit for 2014.

Other tax credit such as the $7,500 for a qualified electric vehicle, on the other hand, can only be taken for the 1 year that it was bought only.

[MGE]

Your correct the Fed credit runs until 2016 and I guess you could apply the remaining credit forward to the next year..... But why? That money could be making you money.

[Volusiano]

Your correct the Fed credit runs until 2016 and I guess you could apply the remaining credit forward to the next year..... But why? That money could be making you money.

For the reason I mentioned, if you don't have enough tax liability to claim all of the credit in 1 year and have to carry over the balance to the next year(s).

Another example is that if you have multiple tax credits that year. Say you buy an electric vehicle and need to claim the $7,500 tax credit for it ALL on the same year. Then you may not have enough remaining tax liability after you claim the $7,500 to claim the whole amount for your solar. So you'd have to do a partial claim on your solar tax credit this year and carry over the balance for the next year(s).

[MGE]

Again why? I must be missing something. From what I was told by my CPA you will get the remaining ballance back from the Fed in a refund. Your telling me I can only use as much credit as I have liability to zero out.

[Volusiano]

Again why? I must be missing something. From what I was told by my CPA you will get the remaining ballance back from the Fed in a refund. Your telling me I can only use as much credit as I have liability to zero out.

Really? That's the first I've heard that you'll get the remaining balance back from the Fed in a refund. If that's the case, why would the Fed bother setting it up as a tax credit then? Why not just set it up as a government rebate? What your CPA told you doesn't make any sense.

[bando]

my understanding (and i'm a CPA) is that you may use as much credit to the extent you PAY taxes, not what you actually owe on April 15th on your Form 1040.

so if you have federal income tax withholding of $10,000 from your paychecks all year long, you can get it up to $10,000 back from the 30% credit. so if you pay $40,000 for solar PV and file for a 30% credit, the IRS will refund the $10,000 you have already withheld. the remaining $2,000 can be carried forward until 2016 in the same fashion.

it makes no difference if you actually owe any money when you file your taxes. the key is how much tax you have paid or owed during the calendar year (either through W2 withholdings or from other income that you will owe federal income tax).


the typical customer that faces not being able to take a full tax credit are retirees with fixed income (social security, etc).


property tax is a local tax assessment, not federal so, no, you can't do any offset there.

[MGE]

You guys are absolutely correct. I guess I need a new CPA. I can only zero out my tax liability and then carry forward any remaining balance until dec 31 2016. Amazing what 10 minutes research on the e-net will do for me. Sorry again I was incorrect in my understanding. I'm squared up now and thanks for the spanking.

[Volusiano]

One other thing people can overlook is that you can also claim the 30% tax credit for labor costs for on-site preparation related to your solar installation. I think things like tree trimming, roof repair, etc related to the solar installation would qualify as on-site preparation.

[halfmonkey]

my understanding (and i'm a CPA) is that you may use as much credit to the extent you PAY taxes, not what you actually owe on April 15th on your Form 1040.

so if you have federal income tax withholding of $10,000 from your paychecks all year long, you can get it up to $10,000 back from the 30% credit. so if you pay $40,000 for solar PV and file for a 30% credit, the IRS will refund the $10,000 you have already withheld. the remaining $2,000 can be carried forward until 2016 in the same fashion.

it makes no difference if you actually owe any money when you file your taxes. the key is how much tax you have paid or owed during the calendar year (either through W2 withholdings or from other income that you will owe federal income tax).


the typical customer that faces not being able to take a full tax credit are retirees with fixed income (social security, etc).


property tax is a local tax assessment, not federal so, no, you can't do any offset there.

I didn't realize that it counts for the total taxes that you've paid through out the year even through tax withholding from your payroll. I'll double check with my cpa but if I'm understanding you guys correctly, it sounds like no matter what I claim on my tax withholdings such as a 1 or 2 or zero, if they take out more taxes than I get as a tax credit from purchasing a solar system, then I'll have to pay the difference between them. I just thought it was squared away on April 15th to say if I owe taxes by the filing deadline, the solar tax credits would be able to offset if I have an obligation. It would seem that if I can use the solar tax credits to cover my in year tax withholdings through my payroll, I should be able to cover most if not all of the taxes with the solar tax credit.

Can someone clarify/confirm if my thinking is right or am I completely wrong here?

[Volusiano]

I didn't realize that it counts for the total taxes that you've paid through out the year even through tax withholding from your payroll. I'll double check with my cpa but if I'm understanding you guys correctly, it sounds like no matter what I claim on my tax withholdings such as a 1 or 2 or zero, if they take out more taxes than I get as a tax credit from purchasing a solar system, then I'll have to pay the difference between them. I just thought it was squared away on April 15th to say if I owe taxes by the filing deadline, the solar tax credits would be able to offset if I have an obligation. It would seem that if I can use the solar tax credits to cover my in year tax withholdings through my payroll, I should be able to cover most if not all of the taxes with the solar tax credit.

Can someone clarify/confirm if my thinking is right or am I completely wrong here?

Your tax withholding from your payroll does not play a role in the tax credit scenario. If you withhold too much then you get a refund. If you withhold too little, you'll owe money. But whether you get a refund or owe money to Uncle Sam at the end of the year due to your tax withholding during the year does not have bearing on your final tax liability, which is based on your incomes minus deductions and such. That's why we only discuss tax liability here and not tax withholding. The tax credit is what you can claim, up to, but no more than your tax liability. If your tax credit is less than your tax liability, then you can claim it all. If your tax credit is more than your tax liability, then you can claim up to your liability, and carry the balance over and claim it next year(s).

[Ian S]

Your tax withholding from your payroll does not play a role in the tax credit scenario. If you withhold too much then you get a refund. If you withhold too little, you'll owe money. But whether you get a refund or owe money to Uncle Sam at the end of the year due to your tax withholding during the year does not have bearing on your final tax liability, which is based on your incomes minus deductions and such. That's why we only discuss tax liability here and not tax withholding. The tax credit is what you can claim, up to, but no more than your tax liability. If your tax credit is less than your tax liability, then you can claim it all. If your tax credit is more than your tax liability, then you can claim up to your liability, and carry the balance over and claim it next year(s).

This is a good explanation. Your tax liability is what's calculated on your return before subtractions for withholding, installment payments, etc. are applied. You tax liability is what counts when deciding whether or not you can utilize the solar tax credit in one year or have to carry some amount over to subsequent year(s).

In contrast, the new tax credits for buying health insurance on the exchange in 2014 are fully refundable meaning that even if you have little or no tax liability for 2014, you will get the full amount of the tax credit paid out to you.

[bando]

yes that's right - my simple $10,000 withholding example above ASSUMED that the tax liability for that individual was also $10,000. but yes, sometimes people withhold more than their actual liability, in which case it would be refunded.

so for example:

you earn 65,000 annual pay
you withheld 10,000 on your paychecks

uncle sam says your tax liability (single, no other income/deductions) would be about 8000 (hypothetically)
so you will get a refund check of $2000


if this same person bought a 40,000 PV system in this same tax year,

they file Form 5695 and get a 12,000 available tax credit

but you can only take up to 8,000 since that is what your tax liability is based on your income
4,000 of that credit can carryover to future years up to end of 2016

so in this case, you would get a check back for $10,000 ($2,000 for excess income tax paid, $8,000 for the PV system credit)