Solar Incentives, Tax Credits And Rebates For Homeowners
6 - Minute Read
Apr 11, 2022
Solar energy reduces our reliance on fossil fuels, lowers greenhouse gas emissions, and helps protect the environment. But, like buying a house or car instead of renting one, installing solar panels requires an upfront investment. As a result, many governments around the world have created subsidies to help their citizens transition to renewable energy and increase return on investment.
In the United States, there is a federal tax credit and sometimes state and local incentives that significantly reduce the cost of going solar, if you’re eligible to take advantage of them. In addition, some states have solar renewable energy certificate (SREC) programs that can produce income from the solar system in addition to credits on utility bills.
It is critical to understand these programs to take full advantage of them, thus boosting the potential return on your solar energy system. Let’s explore some of the different solar incentives available so you can determine if they apply in your situation. Please note that all incentives and rebates are accurate as of time of publication.
Current Solar Rebates And Incentives
There are numerous programs throughout the United States that can reduce the cost of owning a solar power system. However, keep in mind that these programs vary widely by state and utility territory. In addition, some programs are tiered and designed to scale down over time.
Make sure you understand program requirements before going solar to ensure you can take advantage of them. For example, some programs may require you to use a NABCEP-certified installer or install eligible PV equipment.
Federal Investment Tax Credit (FITC) And Federal Solar Tax Credit
The federal government offers a 26% tax credit for installing residential solar energy systems. A tax credit is a dollar-for-dollar reduction in federal income taxes owed to the IRS.
Tax deductions and tax credits are commonly confused, but the two function differently, and tax credits are more valuable. Instead of reducing your taxable income by a certain amount, the solar tax credit offsets the amount owed. Thus, a $2,000 tax credit reduces one’s tax burden by $2,000.
To qualify for the solar tax credit, you must have a sufficient tax liability and own the home where the solar panels are installed, and it must be a primary or secondary residence. Unfortunately, renters are not eligible for the tax credit. Also, it is essential to own the solar installation; those leasing solar panels do not qualify. We recommend speaking with a tax expert to ensure that you are eligible.
The tax credit is set at 26% through the end of 2022, and it applies to the total system cost, including solar equipment and labor. Solar systems with batteries also qualify, including the cost of the batteries themselves. The percentage of the tax credit is scheduled to decrease to 22% in 2023, so now is a great time to go solar before the tax credit decreases in value.
To calculate the value of the solar tax credit, just multiply the total system cost by 0.26 in 2022. Therefore, a $15,000 solar PV system is eligible for a $3,900 credit. Thus, it lowers the total cost to $11,100 if you’re eligible to claim the credit on your taxes.
Some states offer solar incentive programs, but they vary considerably and do not exist in many states. Often, states offer solar rebates that are available on a first-come-first-serve basis. In certain states, incentives are in the form of a tax credit, similar to the federal solar tax credit, except the value of the tax credit varies by state. In addition, some incentives are specifically for low-income residents and have income eligibility requirements. As you can see, it’s important to check your local and state incentive programs to see what you can qualify for.
For example, Arizona offers the Residential Solar Tax Credit, enabling eligible homeowners to receive a tax credit of 25% of the total system cost, up to $1,000 per residence. The incentive reduces personal income taxes, and if the amount of the credit exceeds the taxpayer’s liability, they can save it for up to 5 years.
Solar Renewable Energy Certificates (SRECs)
More than half of states have renewable portfolio standards (RPS). This means the state must produce or procure a certain amount of their power from renewable sources. As a result, utilities frequently purchase SRECs to meet these clean energy standards, and these can benefit solar system owners by creating an income stream from the solar system.
Because these programs vary by state, the price of the credits also varies, and many states do not utilize SRECs. However, in certain states that use SRECSs, selling them can bring in hundreds or even thousands of dollars annually.
Among the states with SREC programs is Pennsylvania, and the price for SRECs varies annually. As of 2022, the price is around $37 per credit. Therefore, if a solar system produces 8-megawatt hours of electricity, the homeowner could make $296 selling credits in the SREC market annually.
Performance-Based Incentives (PBIs)
This incentive compensates solar system owners at a fixed price per kilowatt-hour of electricity produced. Thus, it is tied to the power generation from the system. PBIs operate differently from SRECs because they aren’t sold in a market, and compensation rates are established when the solar PV system is installed.
Installing solar PV panels on a property will likely increase its value because homes with solar have significantly lower utility bills, which is typically more attractive to home buyers. So, some states or municipalities have established property tax exemptions for the added value from solar panels.
For example, if a house is worth $350,000 and then a $20,000 solar panel system is installed, the additional value is not used to determine property taxes. Arizona, Florida, and Texas are among the states that offer property tax exemptions for solar systems.
In addition, some states do not charge sales tax for the purchase of the solar power system. This incentive can save 5% or more off the total system cost, depending on the sales tax rate in a given area. Arizona and Florida are two states that offer sales tax exemption.
Some states and local governments have created low-interest loans to help homeowners pay for the cost of installing solar panels. Often, these loans can also be used for purchasing heat pumps or other environmentally friendly upgrades like an electric vehicle.
In addition to rebates through states, some utilities also offer rebates to incentive their customers to install solar panels. However, these programs vary widely by utility company, and some programs are tiered, so the value of the incentive decreases over time.
In Texas, several utility companies offer rebates. For example, in Austin, Texas, eligible residents can get rebates of up to $2,500. In addition, customers of CPS Energy are also eligible for a rebate of up to $2,500 plus a $500 premium when using local PV modules.
How To Apply For Rebates And Credits
To take advantage of the federal tax credit, it is critical to complete and submit IRS form 5695 with your federal tax return. In addition, homeowners need to have an adequate tax appetite to take advantage of the credit, so speak with a tax expert to ensure that you qualify.
For utility and state programs, the requirements vary widely. For example, if a state offers a tax credit, it is critical to note this on your state taxes and to speak with a tax expert first to ensure you qualify. Other state and utility programs may require submitting a form and meeting specific criteria.
Frequently Asked Questions
Solar incentives can be confusing, but we’re here to help. These are some of the most common questions we hear from solar shoppers about incentives.
What’s the difference between a rebate, tax credit, and incentive?
A rebate usually comes in the form of a check from a utility company or state government, and it usually requires filling out an application and meeting program requirements. By contrast, tax credits are applied when filing the taxes for that year. For example, if you install a solar system in 2022, you can then use the credit when filing taxes in early 2023. Other incentives vary widely by program and may come in the form of a property tax exemption or low-interest loan.
Can I qualify for the federal tax credit if I lease my solar panels?
No, unfortunately not. You must own the solar power system to qualify for the tax credit. Therefore, if you lease your solar panels or are part of a community solar project, you do not qualify for the solar investment tax credit (ITC).
Are there any credits or rebates for solar panel installations?
The federal tax credit is available throughout the United States and can be applied to installation costs. Beyond that, SRECs, utility incentives, state rebate programs, and tax exemptions vary a lot by state or utility territory. The Database of State Incentives for Renewables and Efficiency (DSIRE) is an excellent resource to learn more about incentives in your area.
The Bottom Line: Solar Energy Incentives Can Reduce Startup And Maintenance Costs
In many cases, solar incentives can save homeowners thousands of dollars. The value of the federal tax credit is often several thousand dollars for eligible taxpayers. When available, state tax credits and other incentives can save hundreds or even thousands, and SRECs can bring in some income each year. This is all on top of the potential energy savings from going solar.
It is essential to understand these incentives so you can take advantage of them. With solar incentives, your savings will really rack up quickly.
Ready to go solar? Get started with Rocket SolarSM.
Rocket Solar does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.