Federal Solar Tax Credit

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.

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?

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.