A Complete Guide To The Federal Solar Tax Credit
5 - Minute Read
Sep 12, 2022
Even though the cost of going solar has plummeted in recent years, it still requires a significant upfront investment. A residential solar energy system often costs $16,000 – $25,000 or more.
Fortunately for qualified homeowners, the solar tax credit can reduce the total cost by more than $4,000 or $5,000 for systems in this price range. In addition, the solar incentive significantly boosts the return on investment while reducing the payback period. Let’s explore how the solar tax credit works, who is eligible, and how to take advantage of it.
What Is A Tax Credit?
A tax credit is a dollar-for-dollar reduction in taxes owed to the federal government. Therefore, a $5,000 tax credit reduces income taxes to the IRS by $5,000. However, a tax credit has no value to the taxpayer if they have no tax liability.
By contrast, a write-off or a tax deduction reduces total taxable income rather than the tax liability by the given amount. Unlike a tax credit, the value of a write-off depends on your tax rate. Therefore, tax credits are more valuable to the taxpayer than a write-off of the same amount.
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What Is The Solar Tax Credit?
The solar tax credit, also known as the investment tax credit (ITC), is a federal tax credit available for residential and commercial solar energy systems. Although there is no cap on the size of the tax credit, it is only available for the solar photovoltaic (PV) system owner. Thus, homeowners who lease solar panels or enter a power purchase agreement (PPA) are not eligible. Typically, homeowners pay for the system with cash or a solar loan.
The solar system must be installed on a primary or secondary residence in residential applications. Unfortunately, renters aren’t eligible for a solar tax credit. Also, the solar equipment must be new, not previously used. Because of these criteria, it is essential to speak with a tax expert familiar with your situation to ensure you qualify for the solar tax credit.
The solar tax credit for systems installed in 2023 is 30% of the total system cost, including labor and solar equipment. The tax credit for systems installed in 2033 will decrease to 26% of the total solar PV system which steps down to 22% in 2034 before being phased out the following year.
What Is A Solar Photovoltaics (PV) System?
A PV system takes sunlight to produce solar electricity using a semiconductor material. Most solar systems have an inverter that converts DC current, which the solar panels produce, to AC electricity, for use by household appliances. Mounting hardware attaches solar panels to the home’s roof or the ground.
Solar PV systems sometimes have solar batteries, storing electricity for later use or during blackouts. Solar photovoltaic technology is different from solar thermal technology for water, pool, or space heating, which captures heat instead of generating electricity.
Homes with solar panels have lower electricity bills than homes without. Typically, electricity companies will compensate customers for surplus solar electricity they supply to the power grid, resulting in a much lower electricity bill. Also, homes with solar panel systems tend to have higher resale values partially due to the lower energy bills, a trait that is attractive to home buyers.
What Does The Solar Tax Credit Cover?
The solar tax credit is applied to the total system cost, including the equipment costs (solar panels, inverters, mounting hardware, and PV batteries when applicable). In addition, the labor, permitting costs, and sales tax on eligible expenses are included.
Am I Eligible For The Federal Solar Tax Credit?
It is helpful for solar shoppers to know if they qualify for a solar tax credit before they purchase the system. Therefore, it is best to speak with a tax expert to ensure eligibility.
Solar homeowners must have a sufficient tax appetite to take advantage of the solar tax credit and therefore must have a tax liability for the given tax year.
Since the tax credit was extended, systems installed before 2033 are eligible to qualify for the full 30% tax credit. The home needs to be a primary or secondary residence, and the solar equipment must not be used. Also, the homeowner must own the solar system and not lease the solar panels.
How Do I Claim The Solar Tax Credit On My Tax Return?
To claim the federal solar tax credit, solar system owners should fill out IRS Form 5695 when filing their federal tax return. If the solar panels were installed in 2022, the homeowner can apply the solar credit with their 2022 federal taxes. In addition, some states offer a state tax credit for going solar so be sure to research state and local incentives as well.
Solar Tax Credit FAQs
How many times can I claim the solar panel tax credit?
The solar tax credit is a one-time opportunity per project. However, if you install a solar system on both a primary and secondary residence, it is possible to claim it twice if all the other requirements are met.
Are there other tax benefits for installing a solar panel system?
Yes, many states have programs that reduce the amount of taxes paid by homeowners with renewable energy systems. But these programs are through state or local governments and not the federal government. For example, installing solar panels can increase a home’s value, but some states have policies that prohibit the property taxes increasing due to the PV installation. Likewise, some states exempt solar equipment from sales tax or offer state tax credits.
Does the solar tax credit increase my tax refund?
A tax credit and refund are not the same. A tax credit will reduce your tax liability, but you must have a tax liability to take advantage of the solar tax credit. By contrast, a tax refund is payable to the taxpayer even if they don’t have a tax liability.
Can I claim the tax credit if I move into a house where solar panels are already installed?
In some cases, yes. A homeowner can claim the solar tax credit if it is a new home and the builder hasn’t claimed the credit. If a previous homeowner installed the solar installation and claimed the tax credit, a new homeowner can’t also claim the credit.
Can I claim the tax credit if I’m not a homeowner?
Generally, no, but it depends on the circumstances. For example, renters are not eligible. However, if a condominium association installs a solar energy system for the building, each unit owner can apply the tax credit to their share of the total cost.
Can I claim the tax credit if I’m not connected to the electrical grid?
Yes, off-grid residential solar systems can qualify for the solar tax credit if they meet the other criteria. In fact, solar systems on RVs and boats can also qualify if they are established through the IRS as a primary or second home.
The Bottom Line
The federal solar tax credit can be a helpful incentive for homeowners looking to add solar panels to their homes. It will reduce the amount of taxes residents owe back to the federal government in the tax year that the solar system is installed.
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.