Understanding How Solar Energy is Taxed in the U.S.

What is a Tax Credit?

A tax credit is a reduction in the amount of income tax owed. The federal solar tax credit, also known as the investment tax credit or ITC, allows taxpayers to claim a credit for a percentage of the cost of a solar PV system. This tax credit is available for residential solar energy systems, and it can help reduce the amount of federal income taxes owed. The credit is different from the ITC offered to businesses that own solar systems.

The federal solar tax credit, or investment tax credit (ITC), is an incentive provided by the government to encourage the adoption of solar energy. By offering a tax credit, the government aims to make solar energy more affordable for homeowners. The solar tax credit is a dollar-for-dollar reduction in the amount of income tax owed, allowing taxpayers to offset a portion of the cost of their solar PV system.

Federal Solar Tax Credit Overview

The federal solar tax credit, also known as the residential solar energy credit, is a valuable incentive for homeowners considering solar power installation. This tax credit allows eligible individuals to claim a percentage of the cost of a solar PV system on their federal income taxes. The percentage of the tax credit varies based on the installation year, providing an increasing benefit to those who act sooner rather than later.

For solar PV systems installed in 2020 and 2021, the tax credit is set at 26% of the system cost. However, recent legislation passed in August 2022 extended the tax credit and raised it to 30% for installations between 2022 and 2032. After 2032, the tax credit will gradually decrease to 26% for systems installed in 2033 and 22% for systems installed in 2034. It’s important to note that unless renewed by Congress, the tax credit will expire after 2034.

The federal solar tax credit presents a significant opportunity for homeowners to reduce their income taxes while investing in renewable energy. By taking advantage of this incentive, individuals can contribute to a sustainable future and enjoy the financial benefits of solar power.

Eligibility for the Federal Solar Tax Credit

To take advantage of the federal solar tax credit, homeowners must meet specific criteria. First, the solar PV system must be installed between January 1, 2017, and December 31, 2034. This eligibility period ensures that only recent installations qualify for the credit. Additionally, the system must be located at a residence in the United States.

Furthermore, ownership of the solar PV system is a requirement. The tax credit is only available to taxpayers who own the system. If the taxpayer has purchased an interest in an off-site community solar project, they may also be eligible for the tax credit.

It’s important to note that the solar PV system must be new or being used for the first time. The federal solar tax credit does not apply to existing systems or system upgrades. To claim the credit, taxpayers must meet these eligibility requirements and ensure that their installation falls within the specified time frame.

Expenses Included in the Solar Tax Credit

The federal solar tax credit allows homeowners to benefit from various eligible expenses related to the installation of a solar PV system. These expenses include the cost of solar PV panels, which are the key component of the system. Solar PV panels are designed to capture sunlight and convert it into electricity, making them essential for generating clean and renewable energy.

In addition to the cost of solar panels, the federal tax credit also covers contractor labor costs. This includes the expenses associated with onsite preparation and installation, ensuring that the solar PV system is properly set up and integrated into the electrical system of the home.

Furthermore, the tax credit includes balance-of-system equipment, which refers to the components needed to support the operation of the solar PV system. This includes items such as wiring, inverters, and mounting equipment, which are essential for the efficient functioning of the system.

Additionally, homeowners may be eligible for the tax credit on energy storage devices with a capacity rating of 3 kilowatt-hours or greater. These devices allow homeowners to store excess solar energy generated during the day for use during times when sunlight is not available, such as at night or on cloudy days.

Conclusion

The federal solar tax credit provides homeowners with a valuable opportunity to reduce the costs of installing a solar PV system. By covering eligible expenses such as the cost of solar panels, contractor labor costs, balance-of-system equipment, and energy storage devices, the tax credit helps make solar energy more affordable and accessible. These incentives not only benefit homeowners by reducing their federal income tax liability, but they also support the growth of clean and renewable energy sources, contributing to a more sustainable future.

solar tax credit

Interplay with Other Incentives

When it comes to solar incentives, the federal tax credit is not the only opportunity for savings. Homeowners can take advantage of various other incentives that support clean energy and help reduce the overall cost of installing a solar PV system.

One such incentive is utility rebates. Many utility companies offer rebates or subsidies for homeowners who install solar panels. These subsidies are generally excluded from income taxes and can be subtracted from the cost of the system before calculating the federal tax credit. This means that homeowners can combine the utility rebates with the federal solar tax credit to maximize their savings.

Another incentive to consider is the Renewable Energy Certificates (RECs). These are tradable certificates that represent the environmental attributes of electricity generated from renewable sources, including solar. While payments received for RECs or other environmental attributes may be considered taxable income, they do not reduce the federal solar tax credit. Homeowners can still take advantage of the full tax credit while potentially earning additional income from the sale of RECs.

State-level incentives are also worth exploring.

Many states offer their own tax credits and rebates for installing solar PV systems. These state-level incentives can vary widely in terms of eligibility criteria, available funding, and the amount of savings offered. It’s important to research and understand the specific rules and programs available in your state to maximize your savings. The Database of State Incentives for Renewables & Efficiency (DSIRE) is a comprehensive resource that provides information on available programs and incentives in each state.

solar incentives

Claiming the Solar Tax Credit

To claim the solar tax credit, taxpayers need to fill out IRS Form 5695 when filing their tax return. This form is specifically designed to cover residential energy projects, including solar installations. It allows individuals to provide the necessary information about their tax situation, such as their tax form and filing status.

When completing IRS Form 5695, taxpayers will need to provide details about the cost of their solar PV system, including eligible expenses such as the cost of solar panels, contractor labor costs, and balance-of-system equipment. They will also need to provide certification from the equipment manufacturer that the products meet the requirements for the tax credit.

It’s important to note that the solar tax credit is a nonrefundable credit, meaning it can reduce the taxes owed but cannot exceed the total amount due. If the credit exceeds the taxpayer’s tax liability for the year, any unused portion of the credit can be carried forward to the following year.

Equipment Certification

One key requirement for claiming the solar tax credit is obtaining certification from the equipment manufacturer. This certification ensures that the solar PV system meets the necessary criteria for eligibility. The certification should be provided by the manufacturer either with the equipment or as a separate document, and it should state that the equipment is suitable for use in a qualified residential solar energy system. Make sure to keep this documentation for your records in case of an audit.

Claiming the Solar Tax Credit

State-Level Solar Incentives

While the federal solar tax credit provides significant savings for homeowners, it’s important to explore state-level solar incentives that can offer even more benefits. These incentives can include state tax credits, rebates, and utility-based programs that support clean energy. By taking advantage of these state-level incentives, you can maximize your savings and make your solar PV system installation even more affordable.

State tax credits are a common form of solar incentive that can reduce your state income taxes based on the cost of your solar PV system. These credits vary from state to state, so it’s essential to research the specific rules and programs available in your state. Additionally, many states offer rebates that provide direct cash incentives for installing solar panels. These rebates can help offset the initial cost of your system and further enhance your overall savings.

Utility-based incentives are another valuable resource that can help homeowners go solar. These programs, offered by local utilities, often provide financial incentives based on the size and performance of your solar PV system. These incentives can come in the form of cash payments, bill credits, or reduced electricity rates. They not only help reduce the upfront costs of your installation but also offer ongoing savings throughout the lifespan of your solar system.

FAQ

What is a Tax Credit?

A tax credit is a reduction in the amount of income tax owed.

What is the Federal Solar Tax Credit?

The federal solar tax credit, also known as the investment tax credit or ITC, allows taxpayers to claim a credit for a percentage of the cost of a solar PV system.

What is the percentage of the Federal Solar Tax Credit?

The percentage of the tax credit depends on the installation year. Solar PV systems installed in 2020 and 2021 are eligible for a 26% tax credit. In August 2022, Congress passed an extension of the ITC, raising it to 30% for installations between 2022-2032. The tax credit will decrease to 26% for systems installed in 2033 and 22% for systems installed in 2034. After 2034, the tax credit will expire unless renewed by Congress.

Who is eligible for the Federal Solar Tax Credit?

To be eligible for the federal solar tax credit, the solar PV system must be installed between January 1, 2017, and December 31, 2034. The system must be located at a residence in the United States and owned by the taxpayer.

What expenses are included in the Solar Tax Credit?

The federal solar tax credit covers various expenses related to the installation of a solar PV system, including the cost of solar PV panels, contractor labor costs, permitting fees, inspection costs, and developer fees. Balance-of-system equipment such as wiring, inverters, and mounting equipment are also included. Energy storage devices with a capacity rating of 3 kilowatt-hours or greater may also be eligible.

Can the Federal Solar Tax Credit be combined with other incentives?

Yes, the federal solar tax credit can be combined with other incentives and programs that support clean energy. Subsidies provided by utilities for installing a solar PV system can be subtracted from the system costs before calculating the tax credit. However, payments received for renewable energy certificates or other environmental attributes may be considered taxable income but do not reduce the federal solar tax credit.

How do I claim the Solar Tax Credit?

To claim the solar tax credit, taxpayers need to fill out IRS Form 5695 when filing their tax return. They need to provide information about their tax situation and details about the cost of the solar PV system. Certification from the equipment manufacturer that the products meet the requirements for the tax credit is also required.

Are there state-level solar incentives available?

Yes, state-level solar incentives vary widely and can provide additional savings for homeowners. These incentives can include state tax credits, rebates, and utility-based programs that support clean energy. It is important to research and understand the specific rules and programs available in your state.

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