If you own a home and are considering solar energy, now is a good time to benefit from government incentives like the federal solar tax credit. This tax credit is among the longest-standing solar panel installation incentives that make clean energy affordable for many Americans. It saves homeowners money by letting them claim a percentage of what they spent on a solar photovoltaic (PV) system on their federal income taxes. This blog will discuss how this tax credit works and how to qualify for it.

The Federal Solar Tax Credit

The Federal Solar Tax Credit is a tax credit that lets eligible homeowners deduct 30 percent of their qualified clean energy property installation costs from their taxes from 2022 to 2032. While it does not lower the initial payment to your solar installer, it can significantly decrease the federal taxes you owe in the year you set up solar panels.

This credit was initially called the Investment Tax Credit and was introduced by the Energy Policy Act 2005. With the 2022 Inflation Reduction Act, the ITC was changed to the Residential Clean Energy Credit, its value rose to 30 percent, and its deadline was extended to December 31, 2034.

The credit rate will reduce to 26 percent for clean properties that start service in 2033 and 22 percent for those in 2034. If you have made energy-saving improvements to your home in the United States, you might be eligible for this credit.

This credit is nonrefundable, meaning you cannot receive more than the taxes you owe. You can carry over any unused credit to help reduce your tax bill in future years. There are no limits on how much you should claim each year. You can receive the credit annually for eligible installations until it begins to phase out in 2033. This credit does not cover state or local taxes. You can claim the Residential Clean Energy Credit once for the year you set up your solar system using Form 5695.

It also reduces your tax liability dollar-for-dollar. For example, if you obtain $1,500 in credits, your tax bill will be $1,500 less. After determining your credits, you must include your energy credit details on your regular Form 1040 when filing taxes.

Claiming the Federal Solar Tax Credit

The process of claiming your federal solar tax credit is straightforward. To claim it, you should include your solar tax credits in your annual federal tax returns with the Internal Revenue Service. Your solar system provider will provide the necessary documents and guide you in claiming the credit. Most reliable installers provide this information along with your quote or contract before installing so you have the amount in advance.

Here are the steps to claim the tax credits:

  • Download Form 5695 to add to your tax returns.

  • In Part One of the form, calculate the tax credit. List your solar panel system as “eligible solar electric properties.” On the first line, enter the total costs for the system and installation as stated in the solar system contract.

  • Complete the estimates for 6a and b

  • On the fourteenth line, determine any tax obligation limits using the Internal Revenue Service’s Limit Worksheet.

  • Finish the estimates on the 15th and 16th lines. Transfer the amount on line 15 to Form 1040 on line 5.

If this is your first filing, you should talk to a tax professional or solar installer to confirm you claim the ITC correctly.

You could claim the federal credit for the tax year when you install solar panels. If your yearly tax payment is too low to use the solar tax credit fully in one year, you can roll over the unused amount to future tax returns. However, any solar tax credits that are not used by 2034 will no longer be valid.

After you install solar panels, you can claim the tax credit on your IRS return for the year you set up the system. For example, if you finish your solar installation in June 2024, you can claim the federal tax credit in April 2025.

Eligibility for the Federal Solar Tax Credit

The following are the requirements for federal solar tax credit eligibility:

  • Installation date: You must be a U.S. taxpayer who installed a solar panel system between January 1st, 2006, and December 31, 2034

  • New installation: Your solar project must be new. Homeowners can only claim the credit for the first solar installation, not for reusing or repurposing an existing solar system.

  • Ownership: You must own the solar system. If you lease the system or agree to buy the electricity it generates, you will not claim the credit. The system owner can claim the federal tax credit and local incentives in such cases.

  • Location: Your solar system should be at your primary residence or a second home in the country. You can also obtain a federal tax credit for a community solar project. The electricity must be credited to your home and not exceed your usage.

  • Type of residence: Homes, mobile homes, houseboats, condominiums, and cooperative apartments are eligible for the federal solar tax credit.

There is no income limit for the federal solar tax credit. The tax credit does not disqualify you based on a high income or tax bracket. If you have a low income, you might qualify for additional federal programs to help lower your overall solar costs.

Expenses Covered By the Federal Solar Tax Credit

The RCEC covers these expenses:

  • Solar panels: This credit applies to solar PV panels or cells.

  • Additional Tools: The credit includes other components of the solar system, such as wiring, inverters, and mounting equipment.

  • Solar roofs: If you install solar shingles, the credit only covers the parts that generate power, not the entire roof cost.

  • Batteries: Residential Clean Energy Credit also covers solar batteries. These include storage devices installed with your solar system, added to an existing system, or used as stand-alone solar energy storage.

  • Sales tax: The credit also includes sales tax on qualifying expenses.

  • Labor: Expenses for on-site preparation, assembly, or installation of solar systems are included. These expenses also cover fees for permits, inspections, and developers.

Local and State Solar Incentives

Tax credits, tax exemptions, and net metering are key solar incentives available at the state or local level. These can be combined with the 30% Residential Clean Energy Credit to boost your savings. You can check the Database of State Incentives for Renewables & Efficiency to see what rebates and state tax credits are available in your area.

Tax Credits

Some states offer tax credits in addition to the federal solar tax credit. States like Hawaii, Colorado, Maryland, New Mexico, and Arizona have these credits. Eligibility and claiming processes differ, so visit your local government website and consult your solar installer for details.

Solar Rebates

Certain states provide solar rebate programs with cash incentives for installing solar panels. You can use these rebates alongside the 30% federal tax credit, but remember two key points:

  • The rebate from a government agency does not affect the 30% federal tax credit.

  • If a utility or non-government source provides the rebate, the 30% tax credit is based on the system cost after the rebate.

Net Metering

Currently, 41 states, including California, have net metering laws. If you live in one of these states, you can send extra energy from your solar panels back to the utility grid and earn bill credits. Some states, like Idaho and Texas, do not have statewide net metering rules, but many local utility companies still provide similar programs.

Tax Exemptions

Most states have property tax exemptions for solar systems, meaning you will not incur taxes on the increased value of the property from solar panels. Many states also have sales tax exemptions for solar gear. Your solar system installer can provide the necessary documents for these exemptions.

Incentives differ nationwide, so homeowners must know what they can receive at local and federal levels before installing solar. A professional local installer can help you access local and Federal Tax Credit and state incentives.

Combining Federal and State Tax Credits

Many states offer tax credits for solar panel systems, which you can add to the federal tax credit to reduce the overall solar installation cost. A state tax credit lowers your local tax bill. It can increase the taxable income you report to the IRS. You should talk to a tax professional when using both state and federal tax credits for solar panels.

How to Gain the Most from Your Tax Credit

Make sure you take full advantage of your solar tax credit with some careful planning and effort:

  • Budget and plan for the solar tax credit: Your solar tax credit amount relies on the total cost of the solar installation. Before deciding that a complete solar setup is too costly, remember that you could reduce your overall project costs by 30%.

  • Roll over as needed: If you have concerns about not having enough tax obligations to use the tax credit, you can carry it over to the following year. To obtain the best savings, consult a tax professional before making investment choices.

  • Explore additional tax credits: The federal ITC is not the only option for reducing project costs, even though it is a great benefit.

Commonly Asked Questions

Below are some of the FAQs on the Federal Solar Tax Credit:

How Can the Solar Tax Credit Help You Save Money?

The credit reduces your federal taxes. If you invest $20,000 in a solar system, you can deduct 30 percent, $6,000, from your federal tax bill. (You need to claim the credit in the year the installation is finished.) For example, if you owe $5,600 in taxes before applying the credit, the $6,000 credit will bring your tax bill down to zero. You will not receive a refund for the $400 left over, but you can use that remaining credit in future tax years.

You will also benefit from lower electricity costs. The amount you save will vary based on factors like your household’s electricity usage, the size of your solar system, how much sunlight it receives, and local electricity prices. Real estate experts indicate that owning a solar system, rather than leasing one, can increase your home’s value when you sell it.

How Many Times Can You Claim The Residential Clean Energy Credit?

You can claim the federal tax credit once for the year you set up a solar power system. If you install another solar system on a qualifying property, you can claim the credit again. If your federal tax bill exceeds your credit amount, you can carry the unused portion to future tax years.

Can I Take Advantage Of The Federal Solar Tax Credit If I Do Not Have Any Tax Obligations?

You need to have tax obligations to use a tax credit. If you owe no taxes, the credit will not help you. If you do not owe taxes, consider a solar lease to enjoy solar panel benefits without claiming the tax credit. The leasing company owns the panels and will receive the tax credit. The savings they obtain from the tax credit may lead to lower lease payments for you.

Find a Solar Energy System Installation Company Near Me

The Federal Investment Tax Credit for installing solar energy systems at your home or business offers a significant financial advantage for those interested in renewable energy. It provides a 30% tax rebate on buying and setting up your solar system.

At Sun Solar Electric, we assist you in choosing the right solar panels and system components, and we handle the installation for you. We also ensure customers benefit from all available incentive programs and rebates, including the Federal Solar Energy ITC. We can explain how ITC tax credits function and provide a close estimate of your savings if you reside in the Bay Area and Northern California.

Contact us today at 707-658-2157 for a free consultation, a no-obligation quote, and answers to all your solar energy questions.