With the continuous decline in solar system prices, the prospect of going solar has become more enticing. However, it is crucial to acknowledge that this decision often involves substantial upfront expenses. For instance, a typical six-kilowatt solar energy system can range in cost from $14,500 to $22,000.
What is the federal solar tax credit?
You may be wondering what the Inflation Reduction Act means by “solar energy tax credit”? A solar energy tax credit reduces the amount of money you might owe the federal government. Typically, you can reduce your tax bill by the exact value of the tax credit. For example, if you claim a $1,000 federal tax credit, you will pay $1,000 less in taxes. The federal solar tax credit, which is often referred to as the investment tax credit or ITC, works exactly the same way.
Solar tax credit eligibility
The federal resident solar energy tax credit may be claimed by a homeowner if a system is installed after 2017 and before 2034. You must also own the system (no leasing allowed), live in the United States, and installed a new system at the time you’re claiming the credit. If you do not get a reduction of the full cost of your system, you’ll be able to apply a percentage of the purchase price as a credit. Currently, the credit is 30% through 2032.
It’s important to remember that financial incentives, like the ones outlined above, are often only available for homeowners who buy their solar energy systems outright or obtain a loan to do so. If you are leasing your system from a third party, you will not qualify for the ITC or other financial incentives. Instead, the party that leases you the system—the system’s actual owners—will reap those financial benefits.
Please find below how the ITC percentage will diminish from its high point today to 0% in 2035. Looking ahead, the ITC percentage is projected to undergo notable changes. In the period spanning from 2022 to 2032, the ITC is anticipated to be set at a substantial 30%, reflecting the government's commitment to accelerating the transition to solar energy power sources. However, as we progress further, we can see the ITC is expected to gradually decrease as per the table below:
|
Year |
2022-2032 |
2033 |
2034 |
2035 |
|
ITC % |
30% |
26% |
22% |
0% |
How to claim your solar tax credit
You can claim the federal solar tax credit by filing IRS Form 5695 with your tax return. Here are the specific steps you should follow to claim the federal solar tax credit:
- Download IRS Form 5695 from the IRS website.
- Choose “qualified solar electric property costs” when filling out the form. Determine the system costs and complete the calculations as instructed.
- Enter the resulting number on the appropriate line and find out if you have any restrictions on your tax liability. You can verify that information by using the IRS Residential Energy Efficient Property Credit Limit Worksheet. Complete the calculations.
- Take the resulting number and enter it on Form 1040 in the appropriate place.
Enphase suggests that you consult with a tax preparation expert to make sure you maximize your credit.
State-level solar incentives
State-level solar incentives may further help you reduce the costs of installing solar on your home or business. Though most states have incentives in place—though not all, unfortunately—some of the states with high solar incentives include:
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California
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New York
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Texas
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Minnesota
Check with your specific state’s energy department to see which solar incentives are available to you. Here are a few common ones of which you might be able to take advantage. Keep in mind that the acceptance of some of these incentives might limit your ability to get the full federal solar tax credit:
Utility company solar rebates
Rebates you receive from your utility to install a solar system are not considered taxable income when you go to file your federal returns. They will decrease your federal solar tax credit as the rebates reduce the cost of the system installation.
State government rebates
In general, rebates from state governments will not affect your federal solar tax credit because they don’t often lower the overall cost of the system.
State tax credit
State tax credits don’t usually have an impact on federal credits, and federal credits don’t usually affect state credits. The state tax credit, however, will reduce the amount of state tax payments you can deduct from your federal taxes. As a result, your federal taxable income will be higher, and the amount of your refund may be reduced.
Solar Renewable Energy Certificates (SRECs)
The process for obtaining SRECs varies by state. Typically, you’ll need to register your solar system with the appropriate SREC-granting authority, which will then track your renewable energy production and periodically issue SRECs based on how much energy your system produces. The more energy your system produces, the more SRECs you’ll get. You can then sell your SRECs to your local energy utility, which uses them to fulfill its obligations under state-mandated renewable energy targets.
The six states that have active SREC programs include New Jersey, Massachusetts, Pennsylvania, Maryland, Delaware, and Ohio. SRECs are also available in the District of Columbia.
There are one of two ways to take advantage of your SREC. If you believe you have a sophisticated enough understanding of your state’s SREC market, you can certainly sell them yourself. Most homeowners, however, prefer to rely on the services of an SREC aggregator to maximize the value of their SRECs.
Like the stock market, the values of SRECs can vary significantly from state to state and even within states, depending on market conditions. Make sure you stay updated on the latest SREC prices in your area as they have the potential to reduce your solar payback period significantly.
To see the latest state solar incentives available to you, the North Carolina Clean Energy Technology Center created a valuable, searchable database of incentives by state. Visit DSIREUSA.org and start searching.
Important information as you examine which solar incentives are available to you
Because solar financial incentives aren’t all administered by the same agency, trying to figure out which ones you qualify for can be confusing. When you install your solar panel system, ask your installer for guidance regarding the financial incentives available to you. You should also talk to your accountant or another financial professional about deductions you might qualify for. Know the advantages and disadvantages of solar leasing vs. buying to make your decisions easier.
Find an installer
If you’re ready to make the jump to solar, contact a certified installer today.
FAQs
Can I use the solar tax credit if I don’t owe any taxes?
No. If you don’t have a tax liability, you can’t take the federal solar tax credit.
How many times can you claim the solar tax credit?
Once. You can only claim the solar tax credit the year you install—not purchase—the solar system. If you’ve installed a solar system and taken the tax credit, that is the only time you can take it.
Is there an income limit on who can use the solar tax credit?
There is no income limit for the federal solar tax credit, but you must have enough tax liability to claim the full credit.
Can I claim the federal solar tax credit if I am not a homeowner?
Yes. You may claim the residential clean energy credit for improvements to your main home, whether you own or rent it. Your main home is generally where you live most of the time. The credit applies to new or existing homes located in the United States.
If the tax credit exceeds my tax liability, will it become a refund?
The simple answer is no. The federal solar tax credit is non-refundable, so it does not roll over into a refund if it exceeds your tax liability. It’s important to understand that you can carry over any unused amount of the tax credit to the following tax year.
If I replace my roof with the installation of a solar system, can I also claim the tax credit for the roof replacement?
It depends. If the replaced roof is made up of traditional roof materials and structural components that are only roof, then you can’t claim the credit. On the other hand, if you install solar roofing tiles and solar roofing shingles that both power the home and serve as a roof, then those may qualify. These requirements are constantly being updated, so you should check the Treasury Department’s website frequently for more information.
Can I qualify for the tax credit if the property where the solar system is installed is being used by someone else?
No. Property used by someone other than the homeowner is not eligible for the federal solar tax credit.
Can I use the tax credit against the alternative minimum tax?
Yes. It can either be used to offset the federal income tax or the alternative minimum tax, whichever applies to your specific situation.
I bought a new house that was constructed last year with a solar array, but I didn’t move in until this year. Can I claim the federal solar tax credit this year?
Yes. Assuming your builder didn’t claim the tax credit when they built the house, your array is eligible for the federal solar tax credit for the year you moved into the house. In the example above, that means the solar system is eligible for the current tax year.
