What if my tax bill is smaller than my tax credit amount?

Using the example of the $10,000 solar system, the ITC amount you would be eligible for is $3,000. But what if your total tax liability for that year is only $2,000? Can you carry over the remaining $1,000 to the next year?

It is fairly clear in form 5659 that, yes, you are allowed to carry unused credits forward into the next year (see lines 12-16 of the form) – and possibly beyond. This means that your tax liability for year 1 would fall to $0, and you would have an additional $1,000 of credit to put towards the following year’s tax bills.

However, it is yet unclear whether you will be able to carry unclaimed credits in the years after the ITC is discontinued.

ITC three scenarios

Figure 1: Comparing how the ITC would apply in three tax liability scenarios: a) $5,000 annual tax liability, b) $2,000 annual tax liability and c) $0 annual tax liability. For simplicity’s sake, we assume that the solar system costs $10,000, making the ITC amount would be $3,000. In scenarios a) and b), the ITC benefits are applied over 1 and 2 years, respectively. In scenario c) the ITC cannot be claimed due to insufficient tax liability (meaning that a solar lease might be a preferable option to purchase).