Federal Solar Tax Credit
How does the federal solar tax credit work?
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?
- How can I claim the solar 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?
- The future of the federal solar tax credit
- Download our free Going Solar 101 ebook!
- FAQs 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 this federal solar tax credit. The renewable energy tax credit is available to both eligible residential homeowners and commercial businesses.
More about the solar investment tax credit:
- The tax credit is currently referred to as the residential clean energy credit in the Inflation Reduction Act.
- Although the increased 30% tax credit was approved in August of 2022, that rate is retroactive to systems that were operational any time that calendar year.
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 energy 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 costs $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 of installation.*
More about how the federal solar tax credit works:
- The solar PV system must be operational during the tax year it is claimed and generate electricity for a home located in the U.S.
- The 30% tax credit applies to the total cost of a residential or commercial solar energy system, including labor and equipment.
- The tax credit also applies to solar battery backup systems installed to use with the solar panel system.
- As of 2023, homeowners are eligible to claim the tax credit for standalone energy storage installations with a minimum capacity of 3 kWh. Homeowners are eligible to claim the solar tax credit for installing solar backup batteries. This credit can also be claimed if they retrofit a battery into an existing solar PV system that originally did not include one.
- There is no maximum limit on the federal solar tax credit amount you can claim. If you do not use the entire tax credit the first year, the remaining amount can be rolled over to the following year. The tax credit is set to decrease to 26% for systems installed in 2033 and to decrease again to 22% for systems installed in 2034. The legislation for the credit expires in 2035 unless Congress renews it.
What is covered by the federal solar tax credit?
Homeowners who qualify and claim the federal tax credit could get up to 30% of the cost of their installed solar energy system reimbursed in the form of a tax credit, including the following:
- The cost of solar panels
- Solar equipment costs such as microinverters, necessary wiring and mounting hardware
- 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
Now that you know what costs are covered by the federal solar tax credit, keep in mind that your solar installer plays a key role in the process. They can provide all the necessary paperwork, like detailed bills and proof of payment, to help you get approved for your tax credit without a hitch. Having these documents on hand makes the whole tax credit process much easier down the line.
That said, your solar installer does not file on your behalf. You are responsible for knowing your eligibility for the tax credit, as well as filing on your own or working with a qualified tax professional.
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 the following criteria:
- Your solar PV system was operational after January 1, 2023.
- The solar PV system was installed at a residential location in the U.S. (but not necessarily your primary residence).
- You own the solar PV system (in other words, 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.
It is important to note that your solar installer cannot advise you on whether you are eligible for the federal solar tax credit or help you apply for the credit. Only a qualified tax attorney can take care of these things.
How can I claim the solar tax credit?
ADT Solar does not provide tax advice. You should speak with a qualified tax professional if you have questions about your personal situation. You are responsible for knowing your eligibility for the tax credit, as well as filing on your own or working with a qualified tax professional.
You can claim the federal solar tax credit by filing IRS Form 5695, which can be found on the tax credit’s information page, with your tax return. Carefully follow the instructions on IRS Form 5695 to calculate your credit. Report the credit on your tax return using documentation from your solar installation company and keep records for future reference. If you need more assistance when filing, please speak with your qualified tax professional.
Can you claim the solar tax credit twice?
You cannot claim the solar tax credit twice for the same solar installation. However, unused credit can be carried over to future tax years for up to five years. You can claim the credit multiple times for different eligible properties, provided you live in each one part time. However, rental properties where you don’t reside are ineligible.
You should reach out to your qualified tax professional to get clarification on whether your properties are eligible for the federal solar tax credit.
What is the difference between a tax credit and a tax rebate?
It is 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 owed by $1,000. Tax credits offset the balance of tax due to the government.
If you have no tax liability in the year your solar system is installed and becomes operational, you will not receive a refund from the solar tax credit. 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 remaining credit from this year as a credit towards next year’s taxes.
ADT Solar does not provide tax advice. It is important to speak with a qualified tax professional about your situation as it relates to the federal solar tax credit.
How does the solar tax credit work if I do not owe taxes?
Because the solar tax credit is a nonrefundable tax credit, anyone who does not owe federal income taxes will not benefit from the solar tax credit in the current year. And, if you are 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 federal solar tax credit, there are some that do not. Consult a qualified tax professional to understand your tax liability or eligibility for any tax credits that may result from the purchase of your solar system.
The future of the Federal Solar Tax Credit
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.
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If you’re ready to go solar, ADT Solar is the clear choice. Now is the time to take advantage of the residential clean energy credit.
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FAQs about the Federal Solar Tax Credit
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 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.
There is no income limit for the federal solar tax credit. However, if you owe less in taxes than the credit covers, the remaining credit amount will roll over to the next tax year.
The federal solar tax credit is not transferable. It is designed to benefit the owner of the solar panel system who has sufficient tax liability against which the credit can be claimed. If you sell your property, the new owner cannot claim the credit for the existing solar installation; the credit applies only to the taxpayer who made the original investment and installation.
No, you cannot claim the federal solar tax credit if you install a solar energy system on a rental property that you own.
You cannot claim the federal solar tax credit if you lease your system. The credit is available only to the owner of the solar panel system, which, in the case of a lease, is typically the leasing company. Therefore, while leasing can offer other financial benefits, it does not make you eligible for this particular tax credit.
A new roof is not covered by the federal solar tax credit, even if you’re installing solar panels at the same time. The tax credit is designed specifically for expenses related to the solar energy system, like panels and batteries. Therefore, a new roof, even if it is installed concurrently with a solar system, will not qualify for the credit.