Looking for a solar tax credit roadmap that could help you save some potential money? Then you have come to the right place. Because in this comprehensive guide, we will be telling you how you can save money at the federal, state, and local levels. So, continue reading this blog to get in-depth information.
Installing solar panels on your own can be a very daunting task, especially financially. For an average American family, nearly $17,430 and $23,870 is the cost of a single rooftop solar power system. However, all the money you put into them is worth investing in, but that one-time investment can take a huge toll on your wallet.
Key Takeaways:
- The federal solar tax credit has been increased from 26% in 2020 to 30% for systems installed between 2022–2032.
- PV cells, inverters, batteries, mounting equipment, labor, and contractor expenses are also eligible for solar tax credits.
- To claim the ITC, IRS Form 5695, and Form 1040 are required to be filled.
- You can claim the tax credit only once.
- Solar tax rebates, solar tax credits, and SERC are other solar incentive programs that can reduce your annual tax bills.
The good news is that in the U.S., different states run different solar panel incentive programs based on certain criteria. Plus, there are local rebates that can lower your monthly expenditure and even give you chances to earn money.
So, let’s dig into them and know everything about the 30% solar tax credit for residential solar panel policy.
- What is a tax credit?
- What is a federal solar
- tax credit?
- How do other incentives affect the federal solar tax credit?
- Frequently Asked Question
- Will I get a refund, in case, if my tax credit exceeds my tax liability?
- Can I use the solar tax credit against the alternative minimum tax?
- Can I claim the credit, assuming I meet all requirements, if,
- How many times can you claim the solar tax credit?
- Is there an income limit for the federal solar tax credit?
- Conclusion: Is going solar worth it?
What is a tax credit?
A tax credit oftentimes called an investment Tax Credit (ITC), is a powerful way of reducing your taxable income and overall reducing your annual tax bill. It reduces the tax by dollar for dollar that you would otherwise be paying yourself. For instance, if you claim a $500 federal solar tax credit, your net federal tax income will be reduced by $500. Moreover, don’t take exemptions or deductions the same as tax credits. They are different.
What is a federal solar
tax credit?
Installing residential solar panels helps you earn federal solar tax credits that can basically lower your annual tax bill. These tax credits are claimed on federal taxable income for a percentage of the total value of the PV installation system.
How much is the federal solar tax credit?
Seeing the market growth of the solar industry, which has crossed 50% over the last decade, the government has enacted the ITC system. Now the federal solar tax credit has been increased from 26% in 2020 to 30% for systems installed between 2022–2032.
How do solar tax credits work?
You become qualified to claim solar tax credits on your federal income tax when you purchase and install a solar panel system during the tax year and light a home in the United States. It’s also crucial to be aware that you can only use the credits once.
Additionally, if the taxes you owe are less than the credits you earned, it will carry over to the next year and lower your tax payment. Therefore, if you were hoping to receive a reimbursement for those credits, you cannot do so because they are merely a deduction.
Who is eligible for the solar tax credit?
You are eligible for solar tax credit as long as your PV system is installed between January 1, 2006, and December 31, 2023. Additionally, you need to fulfill the following criteria to avail yourself of the ITC:
- The solar system must be located within a residential area in the United States.
- The PV system must be residing in the primary or secondary residence in the US or for an off-site community solar project.
- You must be the owner of the system and not lease it or be in a program where you are buying electricity from a system that you do not own.
- You can only claim for the first time, i.e., when the system is new.
- Also, you can claim the ITC on the original or first-time installation of the PV system.
What are the types of expenses eligible for the solar tax credit?
The entire process of setting up the solar system includes a significant amount of expenses, some of which are eligible for the federal solar tax credit and some of which are not. Below is a detailed list of the expenses qualifying for the claim:
- The solar panel cells used to power the attic ventilator (but not the fan itself)
- Contractor and labor costs, which include on-site inspection, permit fees, preparation, and installation of the system,
- Supporting components for PV systems include wires, inverters, batteries, and mounting apparatus.
- Energy storage devices, or solar batteries, that will be charged by the PV system. They are eligible even if you buy them a year or more after the installation of solar panels.
- Sales taxes on qualified expenses.
When does the federal solar tax credit expire?
The government renewed the tax credits from 26% for the systems installed in 2020 to 30% for the systems installed during 2022-2032. An earlier statute that was slated to expire in 2024 and would have offered a 26% tax credit for PV installations this year and a 22 percent credit in 2023 has been replaced by the law that establishes this credit.Moreover, the claim percentage for the solar panel you installed with their expiration date is listed below:
| Year Installed | Solar Tax Credit (%) |
|---|---|
| 2022-2032 | 30 |
| 2033 | 26 |
| 2034 | 22 |
| 2035 | 0 |
How do I claim the federal solar tax credit?
Once you know all the eligibility criteria for federal solar tax credit, it’s time to know how to claim them. As mentioned earlier, you can claim your solar ITC only once. So, seek out a qualified tax advisor in your area who can walk you through the entire process including the tax forms and the guidelines.
According to Energy Sage, below is a concise explanation of the steps involved in claiming the solar tax credit:
- Fill out IRS Form 5695, which will validate your qualification for the federal solar tax credit. And attach it to your tax return (Form 1040).
- Next, calculate your tax liability from the Residential Clean Energy Credit Limit worksheet instructions and find out if you have enough liability to get the complete 30% ITC in a year.
- File for “qualified solar electric property costs”. And enter the total value of your PV system installation project as written in your contract in line 1.
- As you have not invested in any other renewable source of energy, on line 6a, enter the total value of your solar project again.
- On line 6b, multiply the value of 6a by 30% and enter the calculated value.
- On line 14, enter the tax liability value.
- Follow the rules as stated on lines 15 and 16 and complete the calculations.
- Add the value on line 15 to Schedule 3 and, finally, to the federal tax form 1040.
So, this is how you can claim the federal solar tax credit. And don’t worry about the unused amount that you could not claim within the same year. It will roll on into the next year.
How do other incentives affect the federal solar tax credit?
In addition to federal solar tax credits, there are other rebates and incentive programs that can further lower the total cost of solar panel installation. These include rebates from local electric utility bills, renewable energy certificates, rebates from the state government, and state tax credits. So, summing up all these values will help you save more on your annual income tax return.
State Solar Rebates and Incentives
Solar state rebates are different from other utility rebates. The majority of the time, federal law exempts utility subsidies that you receive in order to construct a PV system from income taxes. But when this is the scenario, your system expenses are removed from the utility rebate for installation solar before you compute your tax credit.
For instance, if you installed your PV system before December 2022 with a total project value of $15,000 and your state government offered you a one-time rebate of $1500, then your federal ITC will be calculated as follows:
0.26 * $15,000 = $3900
Furthermore, each state has its own different incentive programs. Some of the states that offer higher incentives include California, Massachusetts, Texas, Minnesota, and more. So, talk to your local tax advisor and get to know the specifics. Alternatively, you can find the incentives near you by clicking on the Database of State Incentives for Renewables and Efficiency.
State Solar Tax Credit
As mentioned earlier, state tax credits don’t aid in reducing the federal solar tax credits and it goes the mutual ways. However, since you now have a lower state income tax to deduct when you obtain a state tax credit, the taxable income you declare on your federal tax return will be is greater than it otherwise would have been. When a state tax credit is claimed, the total amount is ultimately eventually charged at the federal tax rate.
For instance, assuming a federal income tax rate of 22%, the following calculation is made to determine the net percentage decrease for an owner-occupant in California who claims both the 25% state tax credit and the 26% federal tax credit for a $15,000 system:
0.26 + (1 – 0.22) * (0.25) = 45.5%
Note that the two tax credits are not cumulative (i.e., 25% + 26% = 51%) because lowering state income taxes results in higher federal income taxes paid. The complete cost decrease in this case for a $15,000 system would be calculated as follows:
[$15,000 * 0.26] + [$15,000 * (1 – 0.22) * (0.25)]
Solar Renewable Energy Certificates
The Solar Renewable Energy Certificate (SREC), also known as Solar Renewable Energy Credits, is another solar incentive program run by the state government. So, once you are done with the solar installation system process and have it registered with the state authorities, they track electricity generation units and reward you in the form of SREC over an interval as your contribution towards the environment.
You can further sell this energy certificate to another local energy utility or any buyer who is in need of it and earn money for yourself. And the good thing is this payment will be considered your taxable income and will again lower your annual tax bills. However, it will not reduce your federal solar tax credit.
Additional State or Local Incentives
Local utility rebates
Local utilities frequently offer additional financial incentives to entice individuals to adopt solar panel systems. Some give discounts on power bills based on the system’s energy use, while others offer financial assistance in the subsidized loan form for the PV installation. Therefore, the more electricity your system produces, the more reward credits in KW per hour you will receive.
Tax exemptions
In addition to solar tax credits, you might be eligible for tax exemptions. Why? Because installing solar panels on your property increases its value. And in some states, when assessing property taxes, the cost of solar panel installation will not be included.
Additionally, some states offer tax exemptions on certain components of solar panel systems, which could save you potential dollars. So, always ask the local solar seller before installing the system.
Frequently Asked Question
Will I get a refund, in case, if my tax credit exceeds my tax liability?
First of all, it is important to understand that there is no such thing as a tax refund. And to answer your question, in a case where your tax credits exceed your tax liability, your unused credits will be carried over to the next year.
Can I use the solar tax credit against the alternative minimum tax?
Yes, you can use them against any alternative minimum tax and also against federal IT.
Can I claim the credit, assuming I meet all requirements, if,
a) I am not a homeowner?
Yes. You do not necessarily have to be a homeowner to claim the tax credit. A tenant-stockholder at a cooperative housing corporation and members of condominiums are still eligible for the tax credit if they contribute to the costs of an eligible solar PV system.
b) My solar panels are installed on the property and not on the roof; will I still be eligible for the solar tax credit?
Yes, you are eligible as long as your solar power system is generating electricity for your home.
c) I am not connected to the electric grid?
Yes, you do not necessarily have to connect to the electric grid in order to claim the tax credit, as long as you are producing electricity for your residential home.
How many times can you claim the solar tax credit?
After your solar panel installation, you can only claim the federal solar tax credit once. Moreover, in the case of any used tax credits, you can use them in the following year.
Is there an income limit for the federal solar tax credit?
No, there is no income limit to claim the federal solar tax credit; however, you will need a significant solar tax liability to claim the full amount.
Conclusion: Is going solar worth it?
It is undeniable that the project of installing solar panels involves substantial spending. However, taking into account the previously mentioned state-administered rebates and incentive programs, local utility rebates, subsidized loans or tax exemptions, and federal solar tax credits can help you save money in the long term. In addition, there will be opportunities to make money from it.
If you’re curious about the precise amount you can save using them, there isn’t an exact figure because it depends on a number of other variables, such as the overall cost of your solar project, the regulations of each state, how much electricity you use, and more.
But we can assure you of one thing: it is worthwhile to invest in solar panels system.
