Federal Solar Tax Credit

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Solar energy can save you money on your electric bills and reduce your carbon footprint, but it comes with a high up-front cost. Fortunately, the U.S. government offers a federal solar tax credit, which was recently extended in the Inflation Reduction Act, to help reduce this cost and make the transition to solar more affordable.

This article provides up-to-date information about what the federal solar tax credit is, how to use it, and other tax credits you can take advantage of.

How Does the Federal Solar Tax Credit Work?

The federal solar tax credit, also known as the solar Investment Tax Credit (ITC), allows you to receive a deduction on your federal taxes equal to 30% of your solar panel installation costs for the cost of installing a solar panel system. The policy was introduced as part of the Energy Policy Act of 2005 and was initially set to expire in 2007. However, Congress has extended the policy multiple times, giving homeowners more time to take advantage of the deduction.

Although the policy has remained the same since its introduction, the rate has fluctuated. It was set at 30% from 2016 to 2019, but reduced to 26% in 2020 and was set to remain at that rate for the remainder of 2022.

In August 2022, Congress passed the Inflation Reduction Act which included an extension of the ITC. Homeowners can now claim a 30% tax credit for 2022 installations. The 30% credit is available through 2032. The ITC will drop to 26% in 2033 before reducing to 22% in 2034. It will end in 2035 unless Congress renews it again.

Starting on Jan. 1, 2023, you can also claim the 30% credit for stand-alone solar panel batteries with a minimum of 3 kilowatt-hours (kWh) of capacity. The battery does not have to be directly tied to a solar panel system to qualify.

Do I Qualify for the Federal Solar Tax Credit?

The ITC is available for solar customers throughout the United States. However, the federal government outlines specific qualifications that must be met to take advantage of the tax credit. Before applying for the solar investment tax credit, make sure you meet these qualifications.

New Solar Power System Installed During a Qualifying Tax Year

You must have your solar panel installation completed within the qualifying time period. Homeowners have until Dec. 31, 2032 to receive the 30% tax credit. Otherwise, you will receive 26% in 2023 and 22% in 2034.

The system must also be new or being used for the first time during the specific tax year. You cannot qualify for the deduction with a pre-owned solar system. For example, if you purchased a home with a pre-installed solar energy system, you’re not eligible for the ITC.

You Must Own Your Solar Installation

Solar power companies typically offer up to four financing choices: full price purchase, loan, lease, or power purchase agreement (PPA). Homeowners have complete ownership of the solar project if they purchase at full price or take out a loan. However, if you choose to lease your system or agree to a PPA, the solar company retains ownership of the solar system.

You must own your solar system to qualify for the federal solar tax credit. Make sure to choose either the up-front purchase or solar loan if you want to take advantage of this incentive.

The Property Is Your Primary or Secondary Residence

The solar equipment must be used at either your primary residence or secondary home in the United States. The following types of homes qualify for the deduction:

  • Home
  • Mobile home
  • Condominium
  • Manufactured home
  • Cooperative apartment
  • Houseboat

Rental properties cannot be claimed for the ITC unless you live there for part of the year and rent out the property whenever you aren’t residing there. However, you can only claim the credit for the amount of time that you live at the property. For example, if you only live at the rental property for six months, you qualify for 50% of the deduction (equivalent to six out of 12 months) versus a 100% deduction (equal to 12 out of 12 months).

What’s Covered Under the Solar Investment Tax Credit (ITC)?

The ITC applies to the total cost of the energy-efficient equipment, the cost of labor, and any additional equipment that supports the system. The following equipment meets the eligibility requirements:

  • Solar photovoltaic (PV) panels or PV cells
  • Labor costs for the preparation and installation of your solar PV system, including permits, developer, and inspection fees
  • Solar storage devices that are charged by the PV system (stand-alone batteries qualify after Dec. 31, 2022)
  • Additional equipment that supports the solar system, including mounting equipment, inverters, and wiring
  • Sales taxes on qualified expenses (when applicable)

Only 25 states offer sales tax exemptions for purchasing a solar panel system, so this may not apply to you. Check your state’s solar policies to verify.

How Do I Claim the Federal Solar Tax Credit?

Homeowners will need the necessary tax forms to receive the ITC. The Internal Revenue Service provides detailed instructions for completing the tax form on its website. Below is a general overview of the steps to file*:

  1. Use IRS Form 5695 when you file your federal tax returns.
  2. You will complete Part 1 of the form to calculate your renewable energy tax credit. Keep your receipts for your solar system project and enter the information accurately.
  3. Enter the amount of your tax deduction on your 1040 form.

Remember that the ITC is a tax credit, not a tax refund. The difference is that a tax refund is paid out to the taxpayer, but a tax credit reduces the amount of taxes owed. If your tax liability for the year is less than the ITC, the Internal Revenue Service will not refund you for the tax deduction. Instead, the deduction will roll over to the next tax year.

*We are not a professional tax service provider or preparer. All information provided is for educational purposes only. Please consult a tax professional for tax advice about your federal income tax preparation. You can also contact the Internal Revenue Service directly for any additional information.

Solar Renewable Energy Certificate

A Solar Renewable Energy Certificate (SREC) is a state incentive program that rewards you for the energy your system produces. After registering your system with the state program, you will receive SRECs based on a threshold of kilowatts produced. Homeowners can sell SRECs to utility companies or individuals for profit, but those funds are considered taxable income.

The Renewable Energy Portfolio Standard Program in Washington, D.C., is an example of this type of state incentive.

State Government Rebates

Some local governments offer rebates to encourage residents to transition to solar power. These one-time payments are provided for a limited time and do not count as additional income. For example, the Philadelphia Solar Rebate program offers $0.20 per watt based on the size of the residential project.

State Tax Credits

Solar state tax credits provide similar savings to the ITC but on the state level. These credits reduce your state tax liability and vary in amount and availability. New York offers a generous state tax credit of 25% of your system’s total installation cost.

Tax Exemptions

Property value and property tax increase with typical home renovations, upgrades, and additions. However, many states have made an exception for solar panel installations. Homeowners can benefit from the added value of the solar system without the added tax liability.

Utility Company Rebates

Utility companies may offer rebates to offset solar system costs. These vary by company and can be applied directly to your energy bill or be paid directly to you. Check the terms of your utility company rebate for details about the form of payment.

Texas, in particular, offers numerous utility rebate programs throughout the state, including its largest energy providers, such as  Austin Energy and CPS Energy.

Do Other Solar Incentives and Rebates Affect the ITC?

Solar customers can take advantage of other solar rebates, tax credits, and renewable energy certificates in addition to the ITC. While most incentives don’t affect the ITC, others reduce the total installation costs of your system.

This reduction will affect the amount you report to the IRS on your tax return. Utility rebates, for example, usually don’t count toward your income tax. Instead, the rebate amount is deducted from the total cost of your solar system installation.

On the other hand, incentives such as renewable energy certificates and state rebates would not affect the ITC. These incentives affect other aspects of your income tax, though. State government rebates are added to your taxable income but don’t affect the federal income tax credit.

State tax credits are tax incentives that reduce the amount of owed tax on the state level. However, as your owed state tax amount decreases, the amount of your owed federal income tax increases due to having less state tax to deduct.

Solar Tax Credit Resources

The ITC reduces the cost of solar panels to make the move to solar more affordable. You can check with the Internal Revenue Service for more information about applying for the credit and the proper forms to use. You can also find detailed questions and answers regarding residential solar tax credits and how to carry over any remaining credits to the next tax year.

If you need more information about solar incentives and credits in your area, search the Database of State Incentives for Renewables and Efficiency (DSIRE). This site provides up-to-date information on state-specific solar incentives, credits, and rebate programs for residential and commercial solar customers. You can also find details on state, city, and local municipality solar policies.

Homeowners can also check the U.S. Department of Energy for dedicated resources on the ITC and how it impacts residential and commercial customers. In addition, the Office of Energy Efficiency and Renewable Energy provides the latest research and news about the solar industry.

Our Conclusion

Residential energy customers may be intimidated by the cost of going solar, but the federal solar tax credit helps offset some expenses. This tax credit, along with other solar incentives, credits, and rebates, makes the process as affordable as possible.

Since the ITC has an expiration date, new solar energy customers should take advantage of the tax credit soon. If you are a homeowner looking to go solar, we suggest finding the leading solar energy installers in your area to start the process before the ITC deadline.

Ready to make the switch now? Click here to book a solar consultation with Phoenix today!

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