How Does the Solar Tax Credit Work? The Ultimate Guide
August 31, 2022
If you’re debating adding solar panels to your business or home, you’ve probably heard about the federal solar tax credit.
The federal government is offering a 30% solar tax credit to subsidize the purchase and installation costs of home solar panel systems and commercial businesses throughout the U.S.
Although the solar tax credit was set to expire in 2023, the Inflation Reduction Act recently extended it as a financial incentive for green energy. That means it continues to be a relevant and helpful option for anyone looking to go solar.
Here’s what you need to know about the solar tax credit.
2022 Solar Tax Credit Updates
On Aug. 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. It’s the largest bill in history to fight climate change and includes a significant extension to the federal solar tax credit.
“It invests $369 billion to secure our energy future and to address the climate crisis, bringing down family energy bills by hundreds of dollars by providing working families tax credits. It gives folks rebates to buy new and efficient appliances, to weatherize their homes, and tax credits for heat pumps and rooftop solar,” states Biden.
The tax credit and rebate expansion will give home and business owners more incentives to go solar. There’s also a tax credit available for those looking to purchase a new or used electric vehicle (EV). And if the EV is American-made, buyers will receive a maximum of $7,500.
[Related: Biden Administration Paves the Way for Solar Panel Imports]
What Is The Solar Tax Credit?
Here’s a little history.
Legislators created the solar tax credit in 2005 to make solar energy more affordable by reducing taxes on U.S. homeowners’ purchase and installation costs. Lawmakers extended the solar investment tax credit (ITC) through 2015. Then, Congress approved the 2016 to 2019 federal spending bill.
This further extended the solar panel tax credit by maintaining the 30% off for taxpayers if they completed purchase and installation before Dec. 31, 2019.
However, when Congress passed an extensive omnibus spending package — $900 million in coronavirus relief — the package included another solar tax credit extension. Under the new legislation, the residential solar tax credit was set to be 26% from 2020 to 2022, and then 22% in 2023.
If it weren’t for another extension, via the Inflation Reduction Act, the credit would have expired in 2024. Fortunately, the Inflation Reduction Act increased and extended the credit to 30% through 2032. The credit is now set to reduce to 26% in 2033 and 22% in 2034, after which it will expire if Congress doesn’t renew it again.
The federal solar ITC makes switching to solar power an easy and affordable transition. You can claim it when filing your federal income taxes for your solar photovoltaic (PV) system, battery storage and installation costs.
How Will The Solar Tax Incentive Benefit You?
Most people consider solar panels a major home improvement project. But most people go solar with no money down and eventually generate significant long-term savings by reducing or eliminating their electric bill.
In fact, the average home saves between $20,000 and $40,000 over its solar energy system’s lifetime.
Here are the top financial reasons to go solar.
Electricity Bill Reduction
Even if you don’t produce all the power that your home or business requires, your monthly utility usage drastically decreases.
This utility billing method allows solar owners to send their unused energy to the grid in exchange for credits on their monthly utility bill. Our five service areas (Texas, Colorado, Florida, Virginia and North Carolina) all have net metering in place with local utility companies.
Increase in Property Value
Homes with solar panels sell at higher prices than those without. So if you ever decide to sell your home, you’ll most likely see a higher property value.
State Tax Incentives
Some states offer tax incentives to make owning solar more affordable.
Colorado and Florida both allow an exemption from the state sales tax (or sales and use tax) for the purchase of solar panels, which reduces the system’s up-front price. Similarly, Texas and Florida provide a property tax exemption to ensure homeowners don’t have to pay additional property taxes on their homes’ increased value as a result of their solar panels.
In addition to the federal solar tax credit, local rebates may be available to help reduce installation costs. For example, Austin Energy offers a solar rebate for solar power, as does CPS Energy in San Antonio. Read the complete Texas solar incentives and rebates if you live here or you can see our full list of solar rebates here.
Who Is Eligible for The ITC?
If you meet these criteria, you may be eligible to benefit from the solar ITC:
- You purchased and installed your PV system sometime between Jan. 1, 2006 and today, or you plan to by Dec. 31, 2034.
- Your PV setup is at a U.S. residence or commercial business.
- Your solar panel system is new or unused. You can claim the solar tax credit on only original equipment installations.
How Do I Claim The Solar Tax Credit?
If you purchase a solar energy system and it belongs to your business or household, you’re eligible for the solar tax credit. You can claim the credit once your solar is paid in full, when filing your annual federal tax return.
Make sure to let your accountant know you’ve installed solar panels in the past year. If you file your own taxes, simply use tax form 5695.
Is There an Income Limit for the Solar Tax Credit?
If you’re concerned about income limitations, there’s no maximum cap to qualify for the solar ITC. However, you’ll need a tax liability charge that’s large enough to claim your full credit.
Can the Federal Solar Tax Credit Be Carried Over?
If you don’t have sufficient tax liability to claim your entire solar tax credit in one year, your remaining credits can carry over into future years as long as the tax credit is in effect.
Is the Solar Energy Tax Credit Refundable?
The ITC is a nonrefundable credit. However, according to Section 48 of the Internal Revenue Code, the credit can be carried back one year or carried forward in the next 20 years.
Therefore, if you don’t have a tax liability this year but had one last year, you can still claim the credit. If you don’t have one this year but will at some point in the next 20 years, you can still claim the credit.
Freedom Solar Is An Installer You Can Trust
A solar panel installation is a big project, so it’s important to work with a reliable and reputable team. Whether you’re an average homeowner or a large business such as Whole Foods or Office Depot, Freedom Solar is dedicated to making your switch to solar an easy and affordable transition.
So if you’re thinking about going solar, ready to make the switch to a lifetime of green energy or interested in reducing your tax burden by lowering your electric bill, we’re here to help. You can begin your journey with our 7 Steps to Solar process.
We’ll find every available financial incentive, practice COVID-19-conscious installation methods and offer lifetime service to meet your needs! Check out what our customers say about how we deliver on our promises.
Contact us to request a free, no-obligation virtual consultation with one of our energy consultants. If you’d like to learn more about the ITC, visit Energy Sage and the Solar Energy Industries Association (SEIA).