Table of Contents
- What is the solar investment tax credit?
- How does the federal solar tax credit work?
- What is covered by the federal solar tax credit?
- Am I eligible to claim the solar investment tax credit?
- Can you claim solar tax credit twice?
- What is the difference between a tax credit and a tax rebate?
- How does the solar tax credit work if I don’t owe taxes?
- Other FAQ’s about the federal solar tax credit
What is the solar investment tax credit?
The federal solar investment tax credit (ITC), now referred to as the residential clean energy credit, is a tax credit that can be claimed on federal income taxes for 30% of the cost of a solar photovoltaic (PV) system.
The United States federal government subsidizes the purchase and installation of solar power generating systems with a federal solar tax credit*. The renewable energy tax credit is available to both residential homeowners and commercial businesses. It also significantly reduces the payback time for solar power investments.
About the solar investment tax credit:
- The tax credit is currently referred to as the residential clean energy credit in the Inflation Reduction Act.
- The system must be placed in service during the tax year it is claimed and generate electricity for a home located in the U.S.
- Although the increased 30% tax credit was approved in August of 2022, that rate is retroactive to systems placed into service any time that calendar year.
- The 30% tax credit applies to the total cost of a residential solar energy system, including labor and equipment.
- The tax credit also applies to solar panel batteries. As of January 1, 2023, that includes standalone backup batteries.
- There is no maximum amount that can be claimed.
- If you don’t use all the tax credit the first year, the remaining amount can be rolled over to the following year.
Will there be solar tax credits in 2023?
In August of 2022, the federal government renewed and extended the solar investment tax credit, or residential clean energy credit, as part of the Inflation Reduction Act (IRA), raising the rate from 26% to 30% and ensuring that the credit will be in place at that level until the end of 2032.
Even better, the legislation is retroactive to include solar energy systems that have been activated since January 1, 2022.
How does the federal solar tax credit work?
To put it simply, if you qualify for the federal solar tax credit, you can claim up to 30% of your solar system’s cost as a credit. This could mean lowering the amount of federal taxes you owe at the end of the year.
For example, if your solar energy system cost $30,000, you could receive $9,000 as a tax credit. If your credit is larger than the amount you owe, the remainder could be carried over for the next tax year. The federal solar tax credit covers all components of your solar energy system, including solar batteries and the cost for installation.*
What is covered by the federal solar tax credit?
For homeowners who claim the federal tax credit, they could see up to 30% of the cost of their installed solar energy system covered, including the following:
- Cost of solar panels
- Solar equipment costs, such as microinverters, necessary wiring, mounting hardware, etc.
- Installation and labor costs, including inspection and permitting fees, as well as developer fees
- Solar battery backups or other energy storage systems with a capacity rating of at least 3 kilowatt-hours (kWh)
- Sales taxes that were paid for any eligible solar-related expenses
Am I eligible to claim the solar investment tax credit?
You might be eligible for the 30% solar investment tax credit if you meet all of the following criteria:
- Your solar PV system was ‘placed in service’ after January 1, 2023.
- The solar PV system is located at a residential location in the U.S. (but not necessarily your primary residence).
- You own the solar PV system ( i.e., you purchased it with cash or through solar financing). Solar leasing or solar purchase agreements (PPA) do not qualify for the 30% tax credit.
- The solar PV system is new or being used for the first time. The ITC can only be claimed on the “original installation” of the solar equipment.
Can you claim solar tax credit twice?
You cannot technically claim the solar tax credit twice if you own a home; however, you can carry over any unused amount of the credit to the next tax year for up to five years. Note: if you own more than one home with solar, you may be eligible. In this case, contact your tax professional to find out more.
What is the difference between a tax credit and a tax rebate?
It’s important to understand that this is a tax credit** and not a rebate. Tax rebates are payable to the taxpayer even if they owe no tax.
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. Tax credits offset the balance of tax due to the government. You do not get a refund if you have no tax liability for the year your system goes into service. If you paid taxes through withholding or quarterly estimated filings, the ITC can still be applied, and the prepayments you made may be refunded. Keep in mind that the credit can be carried forward to the following year, which means that you can use any remainder from this year as a credit towards next year’s taxes.
How does the solar tax credit work if I don’t owe taxes?
Because the solar tax credit is a nonrefundable tax credit, anyone who does not owe federal income taxes will not be able to benefit from the solar tax credit in the current year. And, if you’re on a fixed income, retired, or only worked part of the year, you may not owe enough taxes to take full advantage of this solar tax credit.
While many solar panel systems qualify for the solar panel tax credit, there are some that do not. Consult a qualified tax professional to understand any tax liability or eligibility for any tax credits that may result from the purchase of your solar system.
Additional Solar Panel Tax Credit FAQs
This is a nonrefundable tax credit, meaning you will not get a tax refund for the amount of the solar tax credit that exceeds your tax liability. However, you can carry over any unused amount of the solar tax credit to the next tax year.
Yes. The residential clean energy credit can be used against either the federal income tax or the alternative minimum tax credit.
File Tax Form 5695 with your tax return.
ADT Solar does not provide tax advice. Be sure to speak with a qualified tax professional if you have questions about your personal situation.
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