The Federal Solar Tax Credit is one of the biggest incentives available to homeowners in the United States.
So what is it and how does it really work?
The federal solar tax credit: all you need to know
The investment tax credit (ITC) is the federal tax credit that allows for you to deduct a portion of the cost of installing a solar energy system from your federal taxes. The ITC applies to both residential and commercial systems and there is no limit on the value of the credit. The average Measure Solar customer who installs solar systems can save over $9,000.
If you’re interested in saving money on solar, then it’s important to understand what you qualify for. Our article covers the basics of the Federal Solar Tax Credit and gives an in-depth review of how it works and what you can expect to save.
Keep in mind, there are many more incentives that you may be able to stack on top of the federal tax credit at the state and local level.
Key takeaways
The ITC lets you offset your home and commercial property taxes by as much as 26 percent of the cost of a solar energy system. It’s an incentive designed to make solar power more attractive and provide homeowners with lower monthly payments.
You must own your solar system to take advantage of the ITC. If you signed a solar lease or PPA, you won’t receive this benefit.
What you’ll learn in this article
- What is the federal solar investment tax credit?
- How does the tax credit work?
- Are you eligible for the tax credit?
- What’s covered by the tax credit?
- How can I get a tax credit?
- When can i claim the tax credit?
- There are so many things that we can do with the money!
What is the Federal Solar Investment Tax Credit?
The ITC was originally established by the Energy Policy Act of 2005 and was set to expire at the end of 2007. Congress passed the law in part because the United States is transitioning to a renewable energy economy. The ITC has been extended multiple times since its inception and will continue to be extended indefinitely into the future.
Now, the solar investment tax credit is available to homeowners in some form through 2022. However, the credits will change in a few years:
2016 – 2019: The tax credit remains at 30 percent of the cost of the system.
2020-2022: Owners of new residential and commercial solar can deduct 26 percent of the cost of the system from their taxes.
2023: Owners of new residential and commercial solar can deduct 22 percent of the cost of the system from their taxes.
2024: Owners of new commercial solar energy systems can deduct 10 percent of the cost of the system from their taxes.
At that point, there are no tax benefits, rebates or other incentives for residential solar energy systems in the United States.
How the solar tax credit works
As long as you own your solar energy system, you are eligible for the solar investment tax credit. Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect.
Remember, you can’t claim the federal income tax credit for your solar investment unless you own the system. However, there are no limitations on who can get the tax credit. Therefore, the program is open to everyone.
Eligibility Requirements for the Solar Tax Credit in 2022
If you’re thinking about going solar and have questions about whether the ITC applies to you, here’s a list of criteria to help you determine if it applies to you.
Your solar PV system was installed between January 1, 2006 and December 31, 2023.
You own the home in the United States and it is the primary or secondary residence
You own the solar PV system, meaning you purchased it outright or financed it with a loan. You did not sign a lease or PPA.
Your solar PV system is new or being used for the first time—the credit can only be claimed on the original installation of the solar equipment.
What’s Covered By The Tax Credit?
Homeowners will enjoy a range of benefits when they use the ITC to lower their total costs on their roof-top solar system. They can expect the following to be covered by the credit:
Installation labor
Permitting costs
Inspection fees.
Batteries
Any & All Additional Solar Equipment
When and for how long can I claim the solar tax credit?
If you’re eligible for the ITC, but you don’t owe any taxes during the given calendar year, the IRS won’t send you a check for claiming the credit.
The 26% ITC is a tax credit that allows individuals and businesses to deduct 26% of their taxes on income earned from sources within the United States.
Think of It like an IRS gift card.
Therefore, if you are still in good standing with your tax bracket, then you will be able to use that to reduce your tax burden in the future.
If the total amount is not able to be applied in a single tax year then the credit is eligible to be carried over for up to 5 years.
Using the federal tax credit in combination with other incentives
Aside from the ITC, there are several other solar incentives to consider. Rebates, state-sponsored programs, and other tax credits depend on where you live. These incentives may be used alone or in conjunction with the ITC to lower the cost of going solar.
Here’s what you need to know about combining solar incentives with the federal ITC: Rebates from your utility company: As a general rule of thumb, rebates from your utility company will not be included in your income tax returns.
Utility Rebates: the utility rebate is only used as a way to make sure that the overall cost of the solar system is less than what you are going to have to pay after the credits and incentives. It’s like saying you are getting a free car with the addition of a $5000 discount. The utility rebate is added first.
State Tax Credit: If you get any state tax credit for your solar system, it will not decrease your federal tax credits. But keep in mind that getting a state tax credit means that your taxable income on federal returns will be higher since you will have less state income tax to deduct.
Renewable Energy Certificates (RECs): A way of generating and selling tax-free credits to offset the cost of energy sources like wind and solar. This allows a company to pay less tax on its earnings and reduce the amount it spends on energy bills.
How do I claim the federal solar tax credit?
You claim the investment tax credit (ITC) for solar when you file your yearly federal tax return.
You claim the investment tax credit for solar when you file your yearly federal tax return. If you have an accountant, remember to let them know you’ve gone solar in the past year, or if you file your own taxes, simply use Measure Solar‘s step-by-step guide on how to claim the solar ITC.
The form that you need from IRS is Form 5695
