How Do Solar Tax Credits Work?

If you are considering solar panel installation for your home or business, you may want to reduce the cost as much as possible. Though the cost of a solar energy system has become more affordable than ever, it is still a sizable investment. The good news is the federal solar tax credit is available, and it could make it far more affordable for you to get a solar system in place. 

Learn how you can install solar panels for your home and take advantage of the tax credit.

What Is the Federal Solar Tax Credit?

The solar tax credit is a way to help reduce the cost of installing a solar system in your home. As a tax credit, it is a dollar-for-dollar reduction. That means that you can lower your federal income tax if you purchase a solar power system. As a tax credit, it reduces what you owe by the amount of the solar tax credit. It is a type of investment tax credit or ITC.

How does the federal solar tax credit work?

The current tax credit is a federal residential solar energy credit. You can claim it only on your federal income taxes. It equates to a portion of the cost of adding a solar PV system to your home. It is applicable if you have purchased a solar power system outright – that is, if you lease a solar panel system, you may not qualify for the tax credit. There are other forms of renewable energy that may also qualify for this.

There are some rules in place regarding the solar tax credit, according to Energy.gov. First, you need to have the solar energy system installed during an eligible tax year.

• If you installed a solar PV system in 2020 and 2021, you are eligible for up to a 26% tax credit.
• In August of 2022, Congress passed a continuation of this tax credit. However, it raised how much could be deducted. That means if you have solar panels installed between 2022 and 2032, you will be able to reduce your federal income tax by 30% of the total cost of installation.
• If you install solar panels in 2033, you may be eligible for a 26% tax credit.
• If you install solar panels in 2034, you can get a 22% tax credit.

The current tax law expires in 2035. However, there is the potential of the government renewing it. Still, the sooner you install solar panels, the sooner you benefit from this form of renewable energy.

Keep in mind that one of the key benefits of the federal solar tax credit is that there is no maximum amount that you can claim. That means if your solar system costs $10,000 to install and you have it installed in 2023, you could get a $3,000 tax credit, which reduces how much you have to pay the IRS that year by $3,000.

Solar Tax Credit Eligibility 

There are some very specific rules associated with the tax credit that you need to work with a solar energy company on to be sure you are meeting those requirements.

The first is installation. To qualify, the solar power system must be installed between 2017 and 2034. Any solar panels installed outside of that timeframe do not qualify.

Second, you must be in the U.S. The tax credit is only available to those who have the solar panel system added to their home in the U.S. There are two ways that this can count:

• You purchase the solar PV system. This could mean that you obtain a loan to buy the solar system or that you pay for it out of pocket.
• You purchased an interest in an off-site community solar project – in this situation, the electricity generated is credited against your home’s electricity bill (though it cannot exceed your electricity needs).

Third, the system must be new or being used for the first time. That means that you cannot use the tax incentive to install solar equipment that is used or otherwise not considered new. If it is not the original installation of the solar energy system, you may not be able to obtain the tax credit.

What Else to Know About the Solar Tax Credit

The federal investment tax credit is a significant savings opportunity. You can use it to reduce your tax liability – saving you directly on your federal taxes. The key to remember here is that the solar investment tax credit only applies to the following costs:

• The cost of solar panels or PV cells
• The cost of labor to have the solar power system installed
• All permitting fees, inspection costs, and any other fees from the developer
• The balance of system equipment, including mounting equipment, inverters, and wiring
• Energy storage devices
• Sales taxes on eligible expenses

SmartSolar.org can help you learn more about the federal tax credit and any other solar incentives available to you.