The Federal Investment Tax Credit, also known as the Solar Tax Credit, is a tax credit that allows you to deduct up to 30% of the cost of your solar energy system from your federal taxes. By helping to offset the cost of purchasing residential solar, the tax credit is designed to get more homeowners to install solar, stimulate investment in the solar industry, and accelerate the pace of solar investment and innovation.
Solar Tax Credit
What is the Federal Investment Tax Credit (ITC)?
Think of the ITC like a coupon for 30% off your home solar installation, backed and funded by the federal government. In the year that you install solar, the ITC can greatly reduce or even eliminate the taxes that you would have otherwise owed to the federal government.
The ITC was originally created by the Energy Policy Act of 2005, and was set to expire just two years later at the end of 2007. Thanks to the ITC, the growth of the solar industry helped create hundreds of thousands of jobs, injected billions of dollars into the US economy, and was a significant step towards cutting down on greenhouse gases, so it was very popular.
According to the Solar Energy Industries Association (SEIA), “The ITC has helped the U.S. solar industry grow by more than 10,000% percent since it was implemented in 2006.” As a result, Congress has extended the expiration date multiple times to continue supporting that growth, including the latest extension that was part of the COVID relief bill and sets the expiration date at the end of 2023.
How does the federal solar tax credit work?
You may understand what the solar tax credit is, but how does the solar tax credit work? As a homeowner, you can claim a federal solar tax credit for the amount of money that you pay towards installing solar, and reduce the amount you owe when you file your yearly federal tax return. The Solar Investment Tax Credit can be filed one time for the tax year in which you install your system using Tax Form 5695. The credit received is then calculated dollar-by-dollar as a reduction of your federal tax liability, so if you have 1,000 credits, you’ll owe $1,000 less in taxes. Once you calculate how many credits you’ve received, you will want to add your renewable energy credit information to a typical Form 1040 while filing your taxes.
Note that a tax credit is different from a tax refund. In order to claim a tax credit, you must owe taxes to the government, so that the tax credit can cancel out some or all of the amount that you owe. If you’ve already had those tax dollars deducted from your paycheck, then you can get that money back in the form of a refund, but you’re only getting back money that you’ve already paid. If you don’t owe any taxes (for example, if you’re retired and don’t have any income) then you wouldn’t receive any money for the tax credit, because you didn’t owe any money to begin with.
Lastly, the solar panel federal tax credit can be used against either the federal income tax or the alternative minimum tax, so regardless of how you calculate the taxes you owe, you can be eligible to claim the value of the federal income tax credit for solar.
What is the value of the solar tax credit?
The current value of the Solar Investment Tax Credit is 30%.
After the passing of The Inflation Reduction Act of 2022, the value of the solar tax credit is as follows:
30% - Projects that finish construction between 2022 and 2032
26% - Projects that finish construction in 2033
22% - Projects that finish construction in 2034
0% - Projects that finish construction in 2035 or later
Keep in mind, this value is based on the total cost of the system, and the year when your system was installed dictates what credit you are eligible for.
For any system installed in 2022, even if it was installed before The Inflation Reduction Act of 2022 passed, that system will be eligible for the full 30% tax credit during your next yearly tax filing.
How To Qualify for the Solar Tax Credit
In order to qualify for the solar panel tax credit, you must own your home (not lease or rent) and you must pay enough taxes to the federal government (tax liability) that the ITC can offset your tax payment.
For example, if you paid $10,000 to install solar on your home in 2022, then the 30% ITC would mean you are eligible for a tax credit of $3,000. In order to claim that credit, you need to have owed at least $3,000 in federal taxes before the solar tax credit. If you owed more than $3,000 then the ITC would reduce the total amount that you owe. If you owed less than $3,000 then the ITC would eliminate your tax liability for that year.
In addition, if you do owe less than your total ITC savings for the year that you install your solar power system, you can actually “roll over” any remaining credits to the following year, so that you don’t lose the value of those credits. For example, if you were eligible for $6,500 in tax credit, but only owed $4,000 that year, then you would completely eliminate your tax payment for that year, and the next year you would be able to deduct an additional $2,500 from that year’s tax payment as well.
You are also eligible to claim the solar tax credit even if the solar energy system is not on your primary residence. As long as you own the property and live in it for part of the year, you can still claim part of the credit on your taxes to reduce the amount that you owe. However, if you put solar on a pure investment property, such as one that you rent out full time, then you cannot claim the solar energy tax credit.
How much is the federal tax credit for solar panels?
In 2022, the Solar Energy Investment Tax Credit covers up to 30% of the cost of your solar power system. However, you may be surprised to learn that there is no maximum dollar amount that can be claimed as a tax credit for your solar installation! As long as you owe enough in federal taxes for the credit to cover, you can claim up to the full 30%, regardless of how large your solar power installation is.
The solar tax credit covers any product that directly connects to your solar power system or is needed for the installation, such as solar panels, mounting equipment, inverters, wires, and battery storage systems. The tax credit also covers other items related to getting panels installed on your roof, such as labor costs, assembly, installation, inspection costs, and sales tax.
How To Claim The Tax Credit For Solar Panels
Note: We’re solar experts at Jusi Power, but everyone’s tax situation is unique, so please consult with a tax expert to determine what’s best for you. That said, if you’re looking for information on how to file for a solar panel tax credit, here’s a general overview of how homeowners can claim their Solar Investment Tax Credit:
Determine Eligibility - Make sure you have enough tax liability that you can use the federal ITC to lower the amount you owe for taxes.
Add The Credits To Your 1040 - Once you’ve determined your solar ITC credit information from Form 5695, you use that total on your Form 1040 to reduce the amount you owe.
How many times can you claim the solar tax credit?
You can only claim the solar tax credit one time for your solar power installation. If you have any unused amount remaining on your tax credit that you are unable to claim in a single tax year, you may be able to carry over that tax credit value for up to five years.
Can you claim the solar tax credit twice?
Technically you cannot claim the solar tax credit twice if you own your home. However, if you own more than one home, you may be able to claim separate tax credits for solar installations on each of those homes.
In addition, if you add additional equipment to an existing solar installation, you may be able to claim a tax credit for that added installation cost as well. In general, we always advise customers to speak with a tax professional about any specific tax credit questions, as each situation is unique.
What if my tax bill is less than my tax credit?
If your tax bill is less than the value of your solar tax credit, there is a provision that allows you to carry forward the tax credit to a future tax year. To learn more about your options in that situation, check out Solar Tax Credit: What If Your Tax Liability Is Too Small?
Does the residential solar tax credit apply to new home purchases?
If you buy a new home that already has solar installed, you can still claim the Solar Investment Tax Credit in the year that you move in, regardless of when the house was originally built or sold. For example, if your home was built in 2020, and then you bought it in 2021, but didn’t move in until 2022, then you would claim the ITC on your 2022 taxes.
Keep in mind, the ITC can only be claimed once, so you’ll want to check and make sure that your builder hasn’t already claimed the credit. If your builder has claimed it, then you may be able to ask for a reasonable allocation for those costs, and factor that into the final purchase price.
Can you claim the solar tax credit if you lease your solar panel system?
If you lease your solar panels, you do not qualify for the Solar Investment Tax Credit directly, but the company that you lease from may use that tax credit to help lower your monthly payments.
Many solar companies offer leasing options where they will pay for the installation and the cost of the equipment, and then they charge you a monthly fee for the use of those solar panels. The solar company acts as a third party and owns the panels during the terms of the lease, and the homeowner gets the benefit of lower monthly energy costs. Because the solar company owns the panels, they will typically receive the solar tax credit, and the homeowner won’t qualify for the tax incentives. Solar leasing companies may use the value of those tax incentives to lower the monthly cost that they charge homeowners, but it’s typically not going to be a direct pass-through savings, as the solar company will want to retain some of that value.
If you lease your solar panel system, you will not typically receive most state and local solar incentives either, though again, the company you lease from may use those incentives to offset their costs and help lower your monthly payment. In some special cases a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs), but this depends on where your home is located.
Why Now Is The Best Time To Install Solar Panels
The Solar Investment Tax Credit was established by the Energy Policy Act of 2005, and was originally set to expire at the end of 2007. Congress has now extended that expiration date multiple times, but the program is set to expire in 2024, and there are currently no signs that it will be extended again. Because of that, homeowners who are thinking about going solar should do so now, so they can take advantage of those tax savings. Starting in 2024, there will be no federal incentive to going solar, so you’ll be paying more out of pocket for your solar savings.
The solar tax credit has been a major driver of solar industry growth, and for many homeowners, the price difference of a solar power system with and without that tax credit is going to be significant. That’s why there’s never been a better time to go solar and take advantage of the maximum amount of the tax credit that’s still available while you still can.
How To Get Started With Solar And Claim Your Investment Tax Credit
If you’ve ever considered going solar, and thought about how to get your solar tax credit, then there’s never been a better time to get started! The Solar Investment Tax Credit allows you to get money back on your solar energy system, and going solar now will ensure you get the biggest return on your investment while the solar tax credit is still available.
Over the years, the ITC has played an important role in influencing federal policy incentives for clean energy in the United States. The long-term stability of the ITC has allowed businesses to continue driving down costs and investing in their own growth, and by investing in solar, you will be helping create jobs and strengthen the economy, while saving yourself money in the process.
Solar panels are a great way to offset your energy costs and reduce the environmental impact of your home, while giving you energy independence and control over your family’s future. Now is the time to install solar and take advantage of the Solar Investment Tax Credit while you still can!