Federal Solar Tax Credit - Everything You Need to Know

Through The Inflation Reduction Act, the federal solar tax credit can help you offset the cost of purchasing solar for your home. It's not valued at a fixed dollar amount but as a percentage of your spending on installing a residential solar photovoltaic (PV) system.

Learn everything you need to know about the federal solar tax credit, including the value of tax credits and how to qualify for the solar tax credit here.

What Is the Federal Solar Tax Credit?

The federal solar tax credit is a clean energy credit you can claim on your federal returns. It lets you deduct up to 30% of the cost of your solar energy system from your federal taxes. The tax credit can significantly reduce or eliminate any taxes you would otherwise owe to the federal government in the year you install solar.

Officially called the Residential Clean Energy Credit, the federal solar tax credit was designed to get homeowners to go solar, stimulate investment in the industry and accelerate solar innovation.

If you install solar energy equipment in your home any time this year through the end of 2032, you can get credit off your federal income taxes. There's generally no dollar limit on these expenses — you can receive the 30% tax break whether you spend $30,000 or $100,000 on fees associated with your home solar system.

How Does the Federal Solar Tax Credit Work?

The solar tax credit lowers your federal taxes, and you can only file for it once. While everyone's tax situation is different, you can determine your eligibility for the tax credit and then use Tax Form 5695 to calculate your credits before adding that number to your typical Form 1040 when filing your yearly taxes.

Note that the solar tax credit does not apply to state or local taxes. It also differs from a tax refund. To get a tax credit, you are required to owe taxes to the federal government so the tax credit can void some or all of the amount you owe. Say you are retired and don't have an income. You wouldn't receive any money for the tax credit since you didn't owe any money to begin with.

If you've had the tax dollars deducted from your paycheck, you can get the money back as a refund, but you only get back what you've already paid. If you would owe $7,000 in taxes before the credit and receive a $7,100 credit, the amount you owe will drop what you owe to zero. You cannot get a tax refund for the $100 remainder, but you can roll it over to next year's income taxes.

Lastly, the solar federal tax credit can be used against either the federal income tax or the alternative minimum tax. Regardless of how you calculate your owed taxes, you can claim the value of the federal income tax credit for solar.

How Long Does the Solar Tax Credit Last?

The 30% solar tax credit lasts until December 31, 2032. The Residential Clean Energy Credit, the current name of the solar tax credit initially known as The Investment Tax Credit (ITC), was created by the Energy Policy Act of 2005.

Since its creation, the ITC has aimed to encourage the growth of the solar industry, create jobs, inject money into the economy, and help the nation cut greenhouse gas emissions. According to the Solar Energy Industries Association (SEIA), the ITC has helped the solar industry grow exponentially since implemented in 2006.

With the signing of the Inflation Reduction Act of 2022, the solar tax credit was renamed the Residential Clean Energy Credit, increased to 30% and extended until the end of 2032. Here's a breakdown of the value of the solar tax credit:

  • 30% for projects installed between 2022 and 2032
  • 26% for projects installed in 2033
  • 22% for projects installed in 2034
  • 0% for projects installed in 2035 or later

Renewable energy tax credits have undergone various value changes, extensions and step-down plans over the years. Before the Inflation Reduction Act of 2022, the value was set to expire in 2024, providing a 26% solar tax credit for installations in 2022 and 22% in 2023. Today, Americans who installed solar in 2022 expecting the 26% credit are now eligible for 30%, providing additional money for purchasing a solar or battery system.

Thanks to the new legislation, federal investment has grown significantly to decarbonize the sectors responsible for the country's greenhouse gas emissions — namely, transportation, electricity and residential, commercial and industrial energy use.

What Is Covered by the Solar Tax Credit?

If you are a homeowner, you're likely wondering which expenses are covered by the new solar tax credit law. According to the Department of Energy, the same costs covered under the old law are covered under the new solar tax credit:

  • Solar PV panels or PV cells
  • PV cells — such as those used for electrical power appliances, but not the device itself
  • Labor costs by contractors for onsite planning, assembly or original installation
  • All equipment needed to power the solar system, including inverters, wiring and mounting equipment
  • Permitting fees, inspection costs and developer fees
  • Sales taxes on the above eligible expenses

Note that equipment for solar PV lease agreements does not qualify since you won't own the system by the conclusion of the payment period.

While it's a given that solar-powered equipment is covered, the tax credit also covers battery storage units with a capacity rating of at least 3 kilowatts. You can also claim a tax credit for storage batteries if you buy or install them a year or more after installing the solar system.

The Inflation Reduction Act of 2022 also includes rebates for various products to help electrify the home, allowing appliances to power renewable energy rather than fossil fuels. For instance, you can receive up to $8,000 in rebate for a heat pump, up to $840 for an electric stove or clothes dryer and up to $4,000 for electrical system upgrades.

Electrical system upgrades are especially crucial for homeowners considering solar since they are often necessary before you can install solar panels or battery storage systems. Overall, the rebates can help lower the overall cost of your solar installation project.

How to Qualify for the Solar Tax Credit

Though requirements are pretty flexible, you must meet specific eligibility criteria to qualify for the federal solar tax credit. They include:

  • A solar PV system will be installed by the end of 2032.
  • The PV system is located at your primary or secondary place of residence.
  • You own the system and purchased it with cash or a solar loan.
  • The system is in use for the first time.
  • You have an income tax liability.

When it comes to property types, you'll need to install a solar PV system in one of the following to qualify for the solar tax credit:

  • Single-family homes
  • Mobile homes
  • Condominiums
  • Manufactured homes conforming to federal standards
  • Cooperative apartments
  • Houseboats

Vacation homes might only qualify for a partial credit depending on how long you've lived at the property. For instance, living at the property for three months means you can claim 25% of your total credit. Rental properties cannot qualify for the solar tax credit. However, they might be eligible for a business credit instead if you use the property as a home.

You must also own or contribute costs to the PV system to qualify for the tax credit. As a renter, you won't be eligible if your landlord installs the PV system since you don't own it.

How to Claim the Solar Tax Credit

Everyone's tax situation is different, so you should consult a tax expert to determine the right way to claim the solar tax credit. That said, if you're looking for general information on how to file, here's how homeowners can claim it:

  1. Determine your eligibility: The first step to claiming the tax credit is determining your eligibility. Use our guide to determine if you meet the basic requirements to claim the credit, including having the proper equipment and property type. Ensure you have enough tax liability to use to lower the overall tax amount you owe. Then, consult a tax professional or accountant for further guidance.
  2. Complete IRS Form 5695: Using Tax Form 5695, available online, you can validate whether you're qualified for renewable energy credits. The credit is calculated dollar-by-dollar, reducing your federal tax liability. In other words, if you receive $5,000 in credits, you'll owe $5,000 less in taxes. Say you spend $20,000 on a system. In that case, you'd subtract 30%, or $6,000, from your federal taxes.
  3. Add the credits to your 1040: After calculating the credits you've received, you can then add your renewable energy credit information to a typical Form 1040. So, if your tax credit is $6,000 off a $20,000 solar system, it will knock the overall price down to $14,000.

Be advised that not everyone will get or receive the total amount from their credit, so you should consult an accountant for accuracy. The calculated costs for your solar system will include purchases for qualifying equipment, labor and other fees, as mentioned above. You can also include rebates and state tax credits when filing.

How Many Times Can You Claim the Solar Tax Credit?

You can only claim the federal solar tax credit once for your PV system installation. If you have an unused amount on your credit, you cannot claim it in a single tax year. However, you might be able to carry that tax credit value for as long as the tax credit is in effect, among other eligibility requirements.

While you cannot claim more than once for a single home, you might be able to claim separate tax credits for solar system installations on each home if you own more than one residence.  

If you add more equipment to an existing installation, you might be able to claim a credit for the added costs. It's best to speak with a tax professional about specific tax questions since each situation is unique.

How Does the Federal Tax Credit Affect Other Solar Incentives?

The following solar incentives can impact your federal tax credit:

Rebate From Electric Utility

In most cases, subsidies from your utility that you use to install your solar are excluded from income taxes through federal law exemption. When this occurs, you can subtract your utility rebate from installation and associated costs before calculating your tax credit. For instance, if you installed a $16,000 PV system in 2022 and you receive a utility rebate of $2,000 for installing the system, you would calculate your tax credit as follows:

  • ($16,000 - $2,000) * 0.30 = $4,200

However, any payments from public utilities to counter excess electricity generated that is not consumed by the taxpayer but delivered to their electrical grid are not subsidies for installing qualifying property. Net metering credits, for instance, do not affect your credit amount or eligibility.

Renewable Energy Certificates

When your utility or another buyer offers an incentive for renewable energy certificates, the payment will likely be considered taxable income. Any environmental features of the generated electricity — upfront or overtime — apply. In this situation, the amount will increase your gross income without lowering the solar tax credit amount.

Rebate From Your State Government

In contrast to utility rebates, state government rebates will generally not lower your tax credit. For instance, if your solar system was installed in 2022, installation costs amount to $16,000, and you received a state rebate of $2,000 for installation, you would calculate your tax credit with the following formula:

  • $16,000 * 0.30 = $4,800

State Tax Credits

State tax credits for installing solar systems will not reduce federal tax credits, and the opposite is also true. Still, when you get a state tax credit, the taxable income reported on your taxes might be higher than you envisioned since you will deduct less state income tax. With the Tax Cuts and Jobs Act of 2017, there is now a $10,000 limit on state and local tax deductions through 2025.

As a result, if you pay more than $10,000 in state and local taxes after claiming your state tax credit, the state credit benefit will not be lowered by the federal tax rate since it won't affect federal taxes as a result of the limit. If you were to claim the state tax credit, the amount would be taxed at the national tax level.

Is the Solar Tax Credit Refundable?

The solar tax credit is nonrefundable, so you will not get a tax refund for the amount of tax credit that surpasses your tax liability. However, you can roll the surpassed tax credit amount over to the following tax year.

Why Now Is the Best Time to Install Solar Panels

Thanks to the solar tax credit, there's no better time to go solar than the present. In the coming years, we will see more and more people purchasing electric cars, heat pumps, battery storage systems and, of course, solar panels to power their homes. You can get ahead of the curb by taking advantage of the solar tax credit and installing solar panels on your property. The installation offers financial benefits while helping you reduce your carbon footprint and help secure a safer future for our planet.

At S&H Solar, we offer a one-stop shop for all your solar needs. From initial property evaluation and expert knowledge to installation and lifetime solar maintenance, we will work with you every step of the way as you make the change to solar.

To get started, request a free quote with us today!

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