The U.S. government offers the federal solar tax credit to support the solar industry’s growth throughout the country. A move to solar energy can potentially help you save money on your utility bills by eliminating the need to use expensive fossil fuels. Renewable energy also helps support the government’s initiatives to move to cleaner energy, resulting in positive effects on climate change.
Once you decide that solar panels are worth it for your household, the next hurdle is usually the intimidating cost of solar panels. With the average cost running as high as $25,000, it is understandable that you might be hesitant about such a big financial commitment. Thankfully, renewable energy tax credits, like the federal solar tax credit, are available to make your transition to solar power much more manageable.
In this article, we will explain the federal solar tax credit, how to qualify, and the ways that other tax credits work together to make your solar power transition more affordable.
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 26% deduction on federal taxes 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 deduction for residential systems has decreased over time. From 2016 to 2019, homeowners could receive a 30% deduction. In 2020, the deduction was reduced to 26% and will remain at that rate for the remainder of 2022. By 2023, the ITC will drop to 22% and will end by 2024.
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 by the end of the qualifying tax year. For example, when submitting 2022 taxes, your system must have been in place by Dec. 31, 2022, to qualify for the 26% deduction. After this deadline, homeowners must have their system in place between Jan. 1 to Dec. 31, 2023, for the reduced 22% deduction.
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 would not be eligible for the ITC.
You Must Own Your Solar Installation
Solar power companies typically offer up to four choices for financing: full-price purchase, solar loan, leasing, or solar 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.
To qualify for the federal solar tax credit, you must own your solar system. So, if you are looking to take full advantage of the credit, make sure to select either the up-front purchase or solar loan options.
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:
- Mobile home
- Manufactured home
- Cooperative apartment
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 would 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 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
- 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 Apply for the Federal Solar Tax Credit?
Homeowners should complete IRS Form 5695 when they file their federal tax returns. First, you complete Part 1 of the form to determine your renewable energy tax credit. Make sure to keep all of your receipts for your solar system project and enter the information accurately. Next, you enter the amount of your tax deduction on your 1040 form. The Internal Revenue Service provides detailed instructions on completing the tax 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. So, 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 would roll over to the next tax year to be applied to your next year’s tax liability (for up to five years).
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.
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 won’t affect the ITC, others will reduce the total installation costs of your system. This reduction will affect the amount you would report to the IRS on your tax return. Utility rebates, for example, usually don’t count toward your income tax. Instead, the rebate amount would be 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.
Although residential energy customers may initially be intimidated by the overall system cost to go solar, the federal solar tax credit helps offset some expenses. This tax credit, along with other solar incentives, credits, and rebates, supports homeowners with their transition into solar energy, making the process as affordable as possible.
Since the ITC has been set with an expiration date, new solar energy customers should take full advantage of the tax credit very soon. If you are a homeowner looking to go solar, we suggest finding the best solar power companies in your area to start the process before the ITC deadline.
Frequently Asked Questions About the Federal Solar Tax Credit
How many years can I claim the federal solar tax credit?
You can only claim the ITC once on your tax return. However, any unused credits will carry over to the next tax year. For example, if you received $7,000 in solar tax credits but your tax liability was $6,500, you would pay $0 for your owed taxes. Then, the remaining $500 would roll over to the next tax year. The credit can be rolled over for up to five years.
Will the federal tax credit be extended?
The federal government has not announced an extension of the ITC. Therefore, if homeowners want to take advantage of the tax credit, they should complete their solar installation by the end of 2022 for the 26% deduction and 2023 for the 22% credit.
Do state rebates affect the federal solar tax credit?
No. These one-time state rebates do not affect the federal solar tax credit.
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