Your complete guide to the Federal Solar Tax Credit
For many homeowners, installing residential solar panels can be more than a way to reduce environmental impact. Much of the time, it’s also a great way to save money. By reducing dependence on traditional utility companies in favor of the free, renewable energy provided by the sun, homeowners can slash or even eliminate their monthly electrical costs.
The major downside to going solar is that the initial investment can be steep. (Think $12-$20,000 for the average home solar installation.) To help offset this cost, the federal government provides some notable financial incentives, including a decent tax credit for solar panels. Here’s what homeowners need to know about claiming that tax credit.
What is the Federal Solar Tax Credit?
The federal solar tax credit, also known as the investment tax credit, allows individuals to deduct 26 percent of the cost of a residential solar installation from their federal taxes. The tax credit is applicable to both residential and commercial systems, and does not have any cap on its value. The average solar shopper can save several thousand dollars this way, potentially making that initial solar investment a bit easier to manage.
The solar tax credit has been around since 2005, and has been renewed by Congress multiple times. As of right now, the credit is set to decline in value after 2022; next year, homeowners will only be able to deduct 22 percent of the value of their solar system, after which the credit could possibly vanish. However, Congress may act to renew and extend the solar credit, as it has done multiple times in the past.
Who is able to claim the Federal Solar Tax Credit?
Who exactly is eligible to claim this solar tax credit? Here is a basic checklist of criteria that you can use to determine whether this tax credit applies to you.
- Your photovoltaic (PV) solar system was installed at any time between January 1, 2006 and December 31, 2023.
- Your system was installed at either your primary residence or your secondary residence, and that residence is located in the United States.
- You own the solar system. This means that you either purchased it outright, or financed it. If you leased it or took out a PPA loan, then you are not eligible for the tax credit.
- Your solar system is brand new, or is just being claimed for the first time. In other words, you can only claim the federal solar tax credit one time. And, if you bought a house that already had solar panels installed, you may not claim them.
How do you claim the solar investment tax credit?
If you leverage the federal solar tax credit, there are a number of costs that may be covered. For example, the tax credit covers the cost of the solar panels themselves, labor costs, costs associated with inspections, and more.
So how do you actually claim that solar credit? It’s a simple matter of filling out IRS form 5695 with your federal tax return. This form will walk you through all the calculations needed to determine the full value of your solar deduction.
Other solar incentives to consider
It’s worth noting that the federal solar tax credit is just one of many ways in which homeowners can save money on their solar installation. Some other options include:
- Rebates from your utility company: Subsidies from your utility company are typically excluded from your income tax returns. As such, the rebate for installing solar must be subtracted from your system cost before you calculate the tax credit for which you are eligible.
- Rebates from state-sponsored programs: Generally, rebates from the state government don’t reduce the amount of your federal tax credit.
- State tax credits: The state tax credits you get for your residential solar system do not decrease your federal tax credit amount. With that said, getting a state tax credit means the taxable income you report on your federal returns will be higher, as you will have less state income tax to deduct.
- Payments from renewable energy certificates: Payments you get from selling renewable energy certificates will likely be considered taxable income. This will increase your gross income, but not directly lower your solar tax value.
Making the most of your solar investment
Over the long term, solar panels can save you lots of money. At the very beginning, however, you may experience a bit of sticker shock. Installing solar panels is pricey, but the federal solar tax credit is just one way in which you can offset your costs for a more manageable investment. For many homeowners, incentives like these put solar power in the realm of possibility. With any questions, your local solar installer can walk you through everything.
