How Does The Solar Tax Credit Work?

The federal tax credit for solar energy systems is known as the Investment Tax Credit, and it allows individuals to deduct up to 30 percent of the cost of their system. This is available until 2033, and it will then drop to 26 percent.

The average person who went solar with the help of the tax credit saved over $6,150 on their solar energy system installation.

How Does The Solar Tax Credit Work

What is the federal solar investment tax credit?

Originally established in 2005 as part of the Energy Policy Act, the tax credit was set to expire in 2007. Due to the popularity of the program, Congress has repeatedly delayed its expiration. In August 2022, it was extended to 30 percent for another ten years.

Homeowners can now take advantage of the tax credit for solar energy systems through 2034. The timeline of the program shows that it will continue to exist until 2034.

  • 2016 – 2019 : The tax credit remained at 30% of the system’s cost.
  • 2020 – 2021 : In 2020, 2021, commercial and residential solar owners can deduct up to 26 percent of the system’s cost from their taxes.
  • 2022 – 2032 : New residential solar system owners can also take advantage of the tax credit by claiming 30 percent of the cost of their system on their taxes. Commercial solar owners will also be able to take advantage of the tax credit until 2025. The Department of Treasury will then decide if the program will continue for commercial installations.
  • 2033 : Taxpayers can deduct 26% of the cost of a new solar system for their home from their taxes.
  • 2034 : Taxpayers can deduct 22% of the cost of a new residential solar system from their taxes.
  • 2035 : Starting this year, there is no longer a federal credit for home solar energy systems.

The tax credit was extended to 30 percent in 2022 after Congress enacted the Inflation Reduction Act. This means that even if a solar system was installed before the legislation was passed, it will still qualify for the 30 percent tax credit.

What’s covered by the tax credit?

If a homeowner uses the 30% ITC, the following will be taken care of:

  • Cost of solar panels
  • Installation labor costs, such as fees for permits, inspections, and developer fees
  • Every piece of extra solar equipment, such as inverters, wiring, and mounting hardware
  • Home batteries charged by your solar equipment
  • Sales taxes on eligible expenses

How the solar tax credit works

If you own a solar energy system and are still eligible for the tax credit, then you can continue to claim it even if you have no tax liability in the next year. This means that even if you have no tax liability in the next couple of years, you can still take advantage of the tax credit.

However, if you are not the owner of the system when you sign a power purchase agreement or lease with a solar installer, then you can’t claim the tax credit. Also, the program doesn’t have an income limit, so people in all income brackets can participate.

Solar tax credit eligibility checklist for 2022

If you are unsure whether or not the ITC applies to you and your home, the following criteria should be kept in mind as a check list:

  • Between January 1, 2006 and December 31, 2034, your solar photovoltaic (PV) system was installed.
  • Your residential solar photovoltaic system in the United States was installed on either your primary or secondary residence.
  • For off-site community solar projects, the electricity generated by the system is credited against your home’s electricity consumption. Taxpayers can also claim Section 25D tax credit if they buy a portion of the project.
  • You are the owner of the solar PV system, or you financed it with a loan or outright purchase. You did not enter into a power purchase agreement, lease, or lease arrangement.
  • The tax credit only applies to the original equipment installed for the solar system. For instance, if you bought a home that came with a solar system that was already installed, you might not be able to claim the credit.

How do I claim the federal solar tax credit?

You can claim the tax credit on your federal tax return if you have a solar energy system in place. You can also notify your accountant if you have gone solar in the past year.

If you are not required to pay taxes in the following year due to the nature of the solar system, then you can still claim the tax credit. The 30 percent tax credit is not refundable, so you can still claim it even if you have no tax liability in the next year. This is because the credit can be carried over to the following year if it remains in effect.

Using the federal tax credit in combination with other incentives

Aside from the tax credit, there are other incentives that can be combined with the federal tax credit to lower the cost of going solar. These include state-sponsored programs and rebates. Although some of these may impact the tax credit, they can still be combined to make solar more affordable.

  • Rebates from your utility company: One of the most common factors that prevents people from claiming the tax credit is the exclusion of utility company subsidies from their income tax returns. This means that any rebate that you receive from your utility company will be taken from the cost of the solar system before it can be claimed.
  • Rebates from the state: These types of rebates typically do not reduce your federal tax credit.
  • State tax credit: The state tax credit, on the other hand, does not reduce the federal tax credit. In fact, it can lower your taxable income because you will no longer have to deduct state income taxes. This is because getting a state tax credit will also reduce your taxable income.
  • Payments from renewable energy certificates: In addition, payments from the renewable energy certificates you sell won’t reduce the tax credit. This means that even though you receive money from the sales, it will still be considered taxable income.

Impact of the solar tax credit

The federal government’s efforts to achieve clean energy goals have led to an increase in the number of incentives for solar. The tax credit has helped various groups, such as businesses and homeowners, lower their solar costs. It has also helped stabilize the energy supply of the country.

The tax credit has also helped the solar industry grow in the United States. According to an industry group, the tax credit has contributed to the industry’s expansion by over 10,000 percent.

How much is the federal solar tax credit for in 2022?

In 2022, the federal tax credit for solar will reduce the cost of a system by 30 percent for commercial and residential tax payers. The Income Tax Credit for residential systems will stop in 2035.

Is the solar tax credit a one-time credit?

Although the tax credit is a one-time credit, it can be carried over to the following year if you can’t use all of it during the year. For instance, if you only owed $6,000 in taxes and got the solar tax credit, you would only pay $0 in taxes for the year. With the additional $200, you would get to reduce your next year’s taxes.

Will the solar tax credit increase my tax refund?

The solar tax credit will not affect your refund. The amount of the tax credit is applied against the amount of money that you owe the IRS.