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What Are Solar Panel Tax Credits?

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solar panel tax credits

If you’re considering solar panel installation for your home, the federal solar tax credit is an incentive that should not be overlooked. 

Homeowners across the US can now apply for a solar tax credit from the federal government. This gives them huge financial help to buy and install a solar power system.

The solar tax credit, which was set to end in 2023, has been extended by the Inflation Reduction Act. This is a great financial incentive for people who want to switch to green energy and use renewable sources of power. 

Now more than ever, the solar tax credit is a viable option for homeowners looking to make their homes as eco-friendly as possible.

Take the SmartSolar.org Quiz to Find Out If Solar Panel Installation is Right for You

2022 Solar Tax Credit Updates

President Joe Biden proudly signed the groundbreaking Inflation Reduction Act of 2022 into law on August 16, 2022. It was the most expensive bill ever made to curtail the effects of climate change, and it extended the federal solar tax credit until the 2030s. 

“It invests $369 billion to secure our energy future and address the climate crisis, bringing down family energy bills by hundreds of dollars and providing working families tax credits. It provides rebates for people to buy new and efficient appliances, weatherize their homes, and tax credits for heat pumps and rooftop solar," according to President Biden in a press release. 

What Is the Solar Tax Credit?

In 2005, legislators created the solar tax credit to make solar energy more accessible by decreasing homeowners' purchase and installation costs. Fortunately, Congress extended this incentive until 2019 with the passage of a federal spending bill. As a result, American homeowners and businesses can now save hundreds on their home energy bills.

Solar panel tax credits are a great way to save on your energy costs. They allow you to offset the cost of installing solar panels by taking advantage of federal and state incentives. These credits can be used to reduce your taxable income, which can lead to significant savings over time. They also help the environment by reducing carbon emissions and promoting renewable energy sources. 

To encourage people to buy solar panels even more, the tax credit was extended so that taxpayers could get a 30% discount if they bought and installed solar panels before December 31, 2019.

In August 2022, Congress passed an omnibus spending bill that gave $900 million to help with the coronavirus. The bill also extended the solar tax credit. This bill makes sure that residential solar systems can get a 26% tax credit until 2022. After that, the rate will drop to 22%.

Thankfully, the Inflation Reduction Act extended and amplified the credit to 30% through 2032. The following years will then see a reduction in the credit from 26% to 22%, at which point it will end unless Congress takes action.

How the Federal Solar Tax Credit Benefits You

Solar panels may seem like a big commitment, but many people choose to go solar with no initial cost and eventually earn substantial savings on their electricity bills. This long-term investment is the key to reducing your monthly utility expenses!

The typical American family pays about $125 for monthly energy bills. By putting money into strong solar systems, you can cut your energy use to zero and save up to $1,500 a year. After installation, you will notice a reduction in your first power bill; however, with consistent use, long-term net savings become clear as the costs of panels and installation are recouped through reduced payments over time.

After considering the wide range of rebates, installation fees for solar panels could total up to $12,000–16,000 on average. At first glance, this fee may seem like a lot, but you'll get your money's worth quickly. Calculations show that it would take about eight years for you to break even on your investment.

The average lifespan of a solar panel system is roughly 25 to 30 years, and given current electricity prices, homeowners can save anywhere from $25,500 to $33,000 on a solar panel system over the remaining 17 to 22 years after they break even. This figure doesn't account for future energy price increases either! Solar panels are an investment that makes good financial sense no matter what your circumstances are.

Even though transitioning to solar can sometimes be a longer process than expected, requiring a few months from start to finish for approvals and inspections, installation, and energizing of the system, all of your patience will undoubtedly pay off. Find the top solar companies near you.

Here are the most compelling financial incentives to install solar panels.

Electricity Bill Reduction

Installing solar panels allows you to generate free energy and drastically reduce your monthly utility costs. Even if you don't produce all the electricity needed for your home or business, you can still enjoy significant monthly savings on your utilities!

Net Metering

With net metering, solar owners can turn unused energy into monthly utility bill credits. Each state has different rules and policies about this method of billing, so it's important to learn about your area before buying a system.

Increase Property Value

Solar panels will ensure a higher sale price if you are ever considering putting your home on the market. By putting money into residential solar energy, the value of your home is sure to go up, which will make selling it much more profitable.

State Tax Incentives

Some states offer tax incentives to make owning solar more affordable. 

Different states have different solar incentives, but California, Texas, Minnesota, and New York have some of the best ones. With a whopping 35% tax credit and a maximum reduction of $5,000, Hawaii's solar tax credit stands out in particular.

For the most comprehensive and up-to-date information about the current state incentive level, see the Database of State Incentives for Renewable Energy (DSIRE). 

Who is Eligible for the Solar Tax Credit?

If you meet these criteria, you may be eligible for solar ITC incentive:

  • You purchased and installed your PV system sometime between Jan. 1, 2023, and December 31, 2032.
  • The solar PV system is located at your residence in the United States. It doesn't have to be your primary residence, but you must have spent some time there during the year.
  • The solar panel system must be new or is being used for the first time.
  • Whether purchased with cash or financing, you must own solar panels. Leasing solar panels does not make you eligible.

Take the SmartSolar.org Quiz to Find Out If Solar Panel Installation is Right for You

How Do I Claim the Solar Tax Credit? 

You can take advantage of this credit when filing your yearly federal income taxes. Just be sure to tell your accountant that solar panels were installed in the past year. If you file your taxes on your own, use tax form 5695 to claim the credits and enjoy the benefits.

For example, the popularity of solar power installation has grown exponentially in the Los Angeles area and throughout California because the cost of solar power has been going down and the state requires that 60% of its electricity come from renewable sources.

Is There an Income Limit for the Solar Tax Credit?

Have no fear if you're worried that your income level may disqualify you from the solar ITC. There's no cap on qualification. However, it is necessary to have a large enough tax liability to claim the entire credit.

Can the Federal Solar Tax Credit Be Carried Over?

The solar tax credit can be spread over several years if you don't have enough to deduct it in one year. As long as the tax break is still available, your remaining credits will carry over into subsequent years.

Is the Solar Energy Tax Credit Refundable?

The ITC isn't refundable, but Section 48 of the Internal Revenue Code says that you can use it to pay back taxes from up to a year ago or save it for the next 20 years. 

As a result, if this year has no tax obligations but last year did – or will at some point in the next 20 years – feel free to take advantage of and claim this credit!

What's Covered Under the Federal Solar Tax Credit?

Maximize your federal tax savings by capitalizing on the ITC. The federal solar tax credit also covers the following:

  • Solar Panels are generally used to operate appliances and devices within the home.
  • Solar photovoltaic (PV) cells, including those used to power an attic fan (but not the fan itself)
  • Onsite contractor labor fees, including permissions and licenses, assessment expenses, and developer payments for setup or preliminary setup, are all covered under the assembly cost.
  • Balance-of-system equipment, including wiring, inverters, and mounting equipment
  • Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater (for systems installed after December 31, 2022). Even years after your initial solar system installation, you're still eligible to receive the advantages of Solar Tax Credit if you purchase and install storage batteries.
  • Sales taxes on all eligible expenses