Federal solar tax credit:some things you need to know
Solar energy is a clean, renewable, and efficient energy source that can help save on electricity bills, reduce carbon emissions, and enhance energy independence. However, the cost of installing solar equipment may deter some individuals. Fortunately, the U.S. government has introduced a highly beneficial tax incentive policy to encourage taxpayers to utilize solar energy: the Solar Investment Tax Credit (ITC).
What is the Solar Investment Tax Credit?
The federal Solar Investment Tax Credit, often referred to as the Investment Tax Credit (ITC) or ITC, is a tax incentive designed to promote solar energy adoption. It operates akin to a coupon that discounts the cost of installing residential solar energy systems, subsidized by the federal government. In the year of solar installation, the ITC substantially reduces or even eliminates the taxes owed to the federal government. For instance, if the cost of installing a solar panel system is $20,000, a credit of $6,000 can be obtained, directly reducing the tax bill.
Originally slated to expire in 2022, the ITC was extended until 2034 as part of the "Consolidated Appropriations Act." Solar investment tax credits are currently available to homeowners in some form until 2034. The year of system installation determines the percentage of solar costs eligible for the credit:
2016 – 2019: Eligible for a 30% credit.
2020 – 2021: Eligible for a 26% credit.
2022 – 2032: Eligible for a 30% credit.
2033: Eligible for a 26% credit.
2034: Eligible for a 22% credit.
2035: The ITC is set to expire, and the federal solar tax credit will no longer be claimable.
How Does the Solar Investment Tax Credit Work?
The federal Solar Investment Tax Credit is valuable, as the amount of the credit received directly reduces the federal tax liability on a dollar-for-dollar basis. For instance, receiving a $1,000 credit results in $1,000 less in taxes owed.
It's important to note that tax credits differ from tax refunds. To qualify for the credit, you must owe taxes. If you don't owe any taxes, you won't receive any money from the tax credit. If your tax liability isn't large enough to claim the full credit in a single year, any remaining credit can be rolled over to subsequent years until the ITC expires in 2034.
Furthermore, the federal solar panel tax credit can be applied to federal income taxes or alternative minimum taxes (AMT), ensuring eligibility regardless of how tax liability is calculated.
Solar Investment Tax Credit Eligibility Checklist:
Must be the owner of the solar equipment, not a lessee or participant in a power purchase agreement (PPA).
Must have installed the solar equipment before December 31, 2024, and commenced usage in the same year or thereafter.
Must utilize the solar equipment to power a primary or secondary residential property, not for commercial or rental purposes.
Must complete IRS Form 5695 on the federal income tax return and provide relevant invoices and documentation.
Eligible for a 26% tax credit based on the installation cost of the solar equipment. Any surplus credit can be carried forward to subsequent years until exhausted if the tax liability is lower than the credit.
What Does the Solar Investment Tax Credit Cover?
Cost of solar panels
Labor costs for installation, including permitting fees, inspection costs, and developer fees
Additional solar equipment such as inverters, wiring, and mounting hardware
Energy storage systems rated three kilowatt-hours (kWh) or greater.
Sales taxes on eligible expenses
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In recent years, federal policies and incentives supporting solar investment have significantly increased, leading to growth in distributed and utility-scale solar deployment nationwide. The federal tax credit enables more businesses, homeowners, and taxpayers to invest in solar energy, reducing costs and enhancing long-term energy stability. The success of the ITC is evident: according to the Solar Energy Industries Association (SEIA), it has facilitated over 200% growth in the U.S. solar industry over the past two decades.
