Federal Solar Tax Credit 101: Everything You Need To Know
Short on Time? Here’s The Article Summary
Introduction
The Residential Clean Energy Credit
In December 2020, the US Congress extended the solar tax credit, providing a 26% tax credit for solar systems installed in residential homes before the end of 2022...
However, as part of the new Inflation Reduction Act of 2022, the tax credit has been extended, as well as increased! The extended tax credit has also been renamed the Residential Clean Energy Credit.
Where the previous 26% tax credit was due to expire at the end of 2022, it has now been extended until 2034 and the credit amount has been increased to 30%!
This update and extension is a welcome surprise for all tax-paying clean energy enthusiasts, as well as the entire solar movement!
What does this mean?
Put simply, for every $1,000 you spend on your solar system, you may be eligible to receive a $300 federal tax credit on your annual tax return...
How does the new extension to the Solar Tax Credit work?
The newly renamed 10-year extension to the previous Solar Tax Credit means those that install a new solar energy system between 2022 and 2032 will receive a federal government tax credit of 30% of the cost of your installed solar power equipment.
As a tax credit, it will be rewarded as a reduction in the amount of tax an individual will owe at the end of the year.
How long will the extended Solar Tax Credit last?
As mentioned, the bill calls for an initial 10-year extension of the tax credit at 30%. After this, it will drop down to a 26% credit in 2033, then a 22% credit in 2034.
In other words, you have 10 years to take advantage of the 30% credit, then the credit is set to phase out at decreasing percentages.
How much money will I actually save by using the updated and extended Solar Tax Credit?
How much you save depends on the overall cost of your system. To do the math, take your total (estimated) costs and multiply it by 0.30 and this will show your savings.
For example, if it's going to cost you $15,000 for all the solar equipment, $15,000 x 0.30 = $4,500. So, you would get a $4,500 reduction from what you owe in federal taxes!
How do I claim the investment tax credit?
It's really pretty simple. You claim the investment tax credit when you file your taxes at the end of the year. Let your accountant know you've gone solar, or if you do your own taxes, you'll need to fill out the IRS Form 5695.
What costs/expenses can you actually claim?
- Solar equipment
- Freight shipping costs
- Solar consulting fees
- Professional installer fees
- Electrician fees
- Engineer fees
- Tools bought or rented
- Wiring, screws, bolts, nails, etc.
- Equipment purchased or rented (scaffolding or a man-lift, for example)
- Permitting fees
- Permitting service costs
Am I Eligible?
Am I eligible to claim the federal solar tax credit?
You may be eligible for the federal tax credit if you meet the following criteria:
- Your solar PV system was installed between January 1, 2006, and December 31, 2034.
- The solar PV system is located at your primary or secondary residence in the United States.
- You own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity generated by a system you do not own).
- The solar PV system is new or being used for the first time.
Frequently Asked Questions
Can I claim the credit even if I do NOT own my home?
Yes. In this case, the amount you spend contributing to the cost of the solar PV system would be the amount you would use to calculate your tax credit. However, you cannot claim a tax credit if you are a renter and your landlord installs a solar system, since you must be an owner of the system to claim the tax credit.
What if I install the system at my 2nd (vacation) home?
You can still claim the credit. Solar PV systems do not necessarily have to be installed on your primary residence for you to claim the tax credit. However, the residential federal solar tax credit cannot be claimed when you put a solar PV system on a rental unit you own, though it may be eligible for the business ITC under IRC Section 48. See 26 U.S.C. § 25D(d), which specifies that eligible solar electric property expenditures must be “for use at a dwelling unit located in the United States and used as a residence by the taxpayer” (emphasis added).
What if my system is NOT connected to the electric grid?
You can still claim the credit. A solar PV system does not necessarily have to be connected to the electric grid for you to claim the residential federal solar tax credit, as long as it is generating electricity for use at your residence.
What if my solar panels are NOT mounted to my roof?
You can still claim the credit. The solar PV panels located on your property do not necessarily have to be installed on your roof, as long as they generate electricity for use at your residence.
What if I financed my system and did NOT buy it in full up front?
You can still claim the credit. If you financed the system through the seller of the system and you are contractually obligated to pay the full cost of the system, you can claim the federal solar tax credit based on the full cost of the system. Miscellaneous expenses, including interest owed on financing, origination fees, and extended warranty expenses are not eligible expenses when calculating your tax credit.
What if I bought solar panels, but have NOT installed them / got them into use yet?
No, you cannot claim the credit. The tax credit is only for systems that were “placed in service” during the year, meaning they are installed and producing electricity for the homeowner.
How do I actually claim the solar tax credit? Is it hard?
After seeking professional tax advice and ensuring you are eligible for the credit, you can complete and attach IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR). Instructions on filling out the form are available here.
Source: Energy.gov - Guide to the Federal Solar Tax Credit
The solar tax credit decreases every year. For example, people who installed a solar system before 2019 were eligible for a 30% tax credit. In 2022, it dropped to 26%, already scheduled to drop to 22% in 2023, and currently set to expire in 2024, unless renewed by Congress....
Final Words
- To qualify, you need to own your solar energy system, not lease it (You can finance it, this is different than leasing... At ShopSolarKits, you'll always be either buying your system outright, or financing, meaning you would qualify.
- If you owe less in taxes than the total amount of your credit, you can carry over the remaining to the following year.
- The tax credit will end soon unless renewed by Congress.
- To learn more, Energy.gov has created a very detailed resource which you can find here.
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*Disclaimer: This is NOT tax advice. Please consult your local accountant or lawyer for more advice and direction, but this post covers everything you need to know when it comes to the federal solar tax credit and getting a simple 26% credit towards your taxes and solar power system!
If you have more questions about what solar kit makes the most sense for your needs, feel free to reach out to us today and we'd be happy to help!
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