The Solar Tax Credit Fails To Help Lower-Income Families
I was actually looking forward to doing my taxes this year.
As a homeowner who installed a solar energy system in 2020, my household is eligible for a big federal tax credit. The Solar Investment Tax Credit (Solar ITC) is a federal solar tax credit that currently offers a 26% credit for the cost of solar systems built on residential and commercial properties. For a residential solar system like ours, the Solar ITC translates into thousands of dollars worth of federal tax credit.
That’s the good news.
The bad news? The Solar ITC is nonrefundable. In other words, it only reduces our tax liability, which doesn’t necessarily translate into a bigger refund. Due to our current household income level, we don’t have much tax liability. Therefore, we can only claim a small fraction of our Solar ITC this year.
Thankfully, the unclaimed portion of the credit does roll over to future years. But if our household income doesn’t increase significantly in the next few years, it may take us a decade or more to claim the full balance of the credit (if it even exists for that long).
The federal electric vehicle tax credit has the same problem. We bought our EV used in 2019, and there are currently no tax credits for purchasing a used EV. But if we had bought a new EV and a solar system in the same year, we wouldn’t have had nearly enough tax liability to claim the EV tax credit or the Solar ITC, much less both.
In other words, we’re one of many American households missing out on the opportunity to claim some or all of the tax credits that wealthier households receive for going solar and electric.
But wait, there’s more!
Having a child actually reduces the amount of the federal solar tax credit we can claim per year. Why? Because having children reduces our tax liability, which in turn reduces the benefits we can receive from the Solar ITC.
Federal tax credits for children are structured so that at our income level, we get a $600 nonrefundable credit (Child Tax Credit) and a $1,400 refundable credit (Additional Child Tax Credit) for our child. The $600 Child Tax Credit reduces our tax liability by $600, which in turn reduces the amount of the federal solar tax credit we can claim per year by $600.
The exact details of a household’s tax liability vary significantly based on the number of children and other tax considerations. But this is a problem that would affect millions of households if they chose to invest in a new solar system. Households with an adjusted gross income in the $30,000 to $60,000 range that install a solar system may have to claim their federal solar tax credit over the course of numerous years (or not at all), especially if they have multiple children reducing their tax liability.
This arrangement isn’t good for low-income and middle-income households looking to install solar. It’s also not good for the growth of the solar industry that the federal solar tax credit is intended to support. And it provides an unfair tax advantage to wealthier households who install a residential solar system.
Low-income and middle-income households already face enough barriers when trying to switch to solar power. They shouldn’t have to face the additional barrier of missing out on a federal solar tax credit that only fully benefits wealthier households.
There’s an obvious solution to this problem. Households in the aforementioned income range would benefit greatly from a partially or fully refundable federal solar tax credit. However, this is unlikely to happen. Why? Because “fiscal conservatives” prefer nonrefundable credits. They like reducing the amount of tax people pay (nonrefundable credit), but don’t like the government sending someone a check (refundable credit).
The fact that the Solar ITC is nonrefundable creates a pool of households who have enough income to install solar (especially given improving financing options), but not enough income to benefit in a timely manner (or at all) from the federal solar tax credit. Such households are therefore less likely to install a solar system — and if they do install one, they receive a “lower or slower” tax credit than wealthier households.
This problem should be remedied at the federal level, both for the sake of fairness for low-income and middle-income households, and for the sake of accelerating a just transition to cleaner energy infrastructure.
The only proposed solution to this that I’ve seen so far involves various approaches where a corporate entity purchases solar power systems for many households, claims the tax credit, and passes along the savings to their customers. While that approach may be better than underutilizing the Solar ITC, it has the down side of shifting actual ownership of the solar system out of the hands of households, who may then lease rather than own the system.
Action should be taken at the federal level to fix this Solar ITC problem, whether it involves creating a refundable credit or some other remedy. In the meantime, state-level programs and utility programs are the only way that households in the aforementioned income range can receive a significant incentive payment within a year of system installation.
Fortunately, because I live in Illinois, our household also received state incentive money through the Illinois Shines program. However, most low-income and middle-income families don’t live in states with comparable state-level incentive programs. And even those who do could benefit greatly from receiving both state and federal incentives rather than just the state incentives. Structuring state and federal solar tax incentives that way would benefit many low-income and middle-income households. It would also accelerate a just transition to cleaner energy sources.
I’m not a tax expert or energy policy expert, so there may be other solutions to this problem that I haven’t mentioned above. But this is definitely a problem. And it’s a problem that I’d like to see solved as soon as possible, both for the sake of working families and for the growth of the solar industry.