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What you need to know about the federal tax credit for solar energy

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Adding a solar panel system to your home is a significant investment, but eventually, those solar panels will pay for themselves and start saving you money. Fortunately, the federal solar tax credit, state credits, and rebates could help ease the pain in your wallet.

If you’re considering adding a solar panel system to your home, the solar tax credit is probably one of your many questions. There are several credits available, depending on your region or state, and the federal credit has just changed thanks to the enactment of the Inflation Reduction Act. This is what you need to know.

How tax credits work

Passbook, cash, calculator and tax credit
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First, we want to explain how tax credits work to clear up any potential confusion. A tax credit is a dollar-for-dollar reduction in the income tax you owe. For example, claiming a $5,000 federal tax credit will reduce your total federal income taxes due by $5,000.

While a tax deduction only reduces the amount of your income that is taxed, a credit will directly reduce your total tax, which is a big difference. Also, the federal solar tax credit is often called the ITC (Investment Tax Credit), and in some places the term is used interchangeably.

What is the Federal Solar Energy Tax Credit?

Solar panels and a lot of cash
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The federal solar tax credit (or ITC) began in 2006 and was set to expire in 2024. However, like the EV tax credit extension in the Inflation Reduction Act, the solar incentives also received a 10-year extension and update. .

In December 2020, Congress extended the original solar credit through 2023, giving Americans up to a 26% tax credit for systems installed in 2020-2022. Instead of dropping to 22% and ending in 2024, it will stay until at least 2032, and the 30% credit is effective immediately.

Those who take advantage of the federal solar tax credit can get up to that 30% dollar-for-dollar reduction in taxes starting in 2023, and we’re not yet sure if past purchases will stay at 26% or retroactively get 30%. %. Either way, considering a solar system can easily cost upwards of $15,000-$20,000, and even more when you add labor costs, etc. This is why the tax credit is so important.

And no, before you ask, if your solar tax credit is more than you owe in taxes, you won’t get a refund for the difference. Fortunately, your tax credit can be divided and deducted on federal income taxes over several years, and thanks to the extension, many can take advantage of it.

What is all included in the credit?

Rooftop solar panels and man giving thumbs up
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Another misconception about the solar ITC is that it only includes the cost of solar panels. When, in fact, it covers a lot of things. You’ll want to keep receipts and have records of everything.

Allowable expenses on the federal solar energy tax credit include the cost of solar panels, all labor costs (such as assembly, installation, permit fees), mounting equipment, energy storage devices such as a battery , wiring, inverters, and even sales tax. When you put it all together, it can be a significant investment that you’ll want credit on.

Solar Tax Credit Eligibility

solar panels on various house roofs
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There are only a few eligibility requirements to take advantage of the current federal tax credit for solar energy. However, we are not sure if any new provisions were added with the extension and will update as we get more information.

Eligibility requirements include:

  • Purchased between January 1, 2006 and December 31, 2023. (Now extended until 2032)
  • Solar PV system is new or used for the first time (original installation only).
  • You must own or finance the system (no leases).
  • The location of the solar panel system must be at your primary or secondary residence in the US.
  • Available only in the United States.

Other solar incentives and rebates

Solar panel savings

And finally, we want to mention that there are state and federal tax credits, rebates, local utility rebates, special tax breaks, battery incentives, and renewable energy certificates (SRECs) available once you go solar. Basically, homeowners are spoiled for choice when it comes to solar power.

While the federal tax credit for solar power is huge, several states (including Puerto Rico) offer additional incentives you can stack on top of the federal ITC. However, these can vary wildly by state, so you’ll want to do your own research on the State Renewable Energy Incentives Database for more information.

That said, the states with the best solar incentives include New York, Rhode Island, Connecticut, Maryland, Colorado, and others. Both California and Texas also have favorable solar incentives.

Some states even offer up-front rebates that will help offset the cost of solar power, but these generally don’t last long. Plus, they typically won’t reduce your federal solar tax credit, which is good news. Solar energy systems and their components are then exempt from state sales tax in select states, saving you money.

In addition, another state discount is the SREC. Once you register your solar panel system with the state (if applicable), the state will track your production and you may receive renewable solar energy certificates. Homeowners can then sell them to the local power company.

Rebates from local utility companies are readily available, but you’ll want to do more research on them. These can be rebates, rebates on energy bills, or even performance-based incentives that will give you a credit for every kilowatt-hour. Keep in mind that most local utility rebates are excluded from income taxes, and any rebates you receive for installing solar will be subtracted from your total system costs before calculating your tax credit. This means you will have a lower total dollar amount for the federal tax credit.

The Inflation Reduction Act also added a tax credit for home battery units with more than 3 kilowatt-hours of storage capacity. Solar-powered homeowners who use a battery storage system when the sun isn’t shining may qualify for other credits.

try solar power

As you can see, there are various federal, state, and local incentives to go solar and invest in renewable energy sources for your home. When you start adding up all the different costs, these incentives can save you tons of money throughout the system.

Since switching to solar power is so expensive, you’ll definitely want to take advantage of the 26% federal tax credit for solar power. Also, now that the new incentive is 30% and spans a decade, you’ll have plenty of time to claim those tax credits for 2-3 years.

So, what are you waiting for? Try solar power.


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