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Solar Tax Credit Explained
What is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes referred to as an Investment Tax Credit (ITC), and a homeowner ITC is different from the ITC offered to businesses that own solar systems.
What is the Federal Residential Solar Energy Credit?
The federal solar credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system paid for by the taxpayer. Solar PV systems installed in 2020 and 2021 are eligible for a 26% tax credit. In August 2022, Congress passed an extension of the ITC, raising it to 30% for the installation of which was between 2022-2032. (Systems installed on or before December 31, 2019 were also eligible for a 30% tax credit.) It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it. There is no maximum amount that can be claimed.
Am I Eligible to Claim the Federal Solar Energy Tax Credit?
You might be eligible for this tax credit if you meet the following criteria:
The solar PV system is located at a residence of yours in the United States.
Your solar PV system was installed between January 1, 2017, and December 31, 2034.
You own the solar PV system (for example, you purchased it with cash or through financing but you are not leasing the system or paying a solar company to purchase the electricity generated by the system).
Or, you purchased an interest in an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption.
The solar PV system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.
How do I Claim the Federal Residential Solar Tax Credit?
You can complete and attach IRS Form 5695, once you make sure you are eligible for credit, to your federal tax return (Form 1040 or Form 1040NR).
What Expenses are Included?
The following expenses are included:
Solar PV panels or PV cells (including those used to power an attic fan, but not the fan itself)
Contractor labor costs for onsite installation, assembly, and/or preparation, including developer fees, inspection costs, and permitting fees
Balance-of-system equipment, including mounting, inverters, and wiring equipment
Sales taxes on eligible expenses
Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater (for systems installed after December 31, 2022). If the storage is installed in a subsequent tax year to when the solar energy system is installed it is still eligible, however, the energy storage devices are still subject to the installation date requirements).
REBATE FROM MY ELECTRIC UTILITY TO INSTALL SOLAR Under most circumstances, subsidies provided by your utility to you to install a solar PV system are excluded from income taxes through an exemption in federal law. When this is the case, the utility rebate for installing solar is subtracted from your system costs before you calculate your tax credit. For example, if your solar PV system installed in 2022 cost $18,000, and your utility gave you a one-time rebate of $1,000 for installing the system, your tax credit would be calculated as follows:
($18,000 - $1,000) * 0.30 = $5,100
PAYMENT FOR RENEWABLE ENERGY CERTIFICATES When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated (either upfront or over time), the payment likely will be considered taxable income. If that is the case, the payment will increase your gross income, but it will not reduce the federal solar tax credit.
REBATE FROM MY STATE GOVERNMENT Unlike utility rebates, rebates from state governments generally do not reduce your federal tax credit. For example, if your solar PV system was installed in 2022, installation costs totaled $18,000, and your state government gave you a one-time rebate of $1,000 for installing the system, your federal tax credit would be calculated as follows:
$18,000 * 0.30 = $5,400
Solar Investment Tax Credit: What Changed?
President Biden signed the Inflation Reduction Act into law on August 16, 2022. One of the many things this act accomplishes is the expansion of the Federal Tax Credit for Solar Photovoltaics, also known as the Investment Tax Credit (ITC). This credit can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system.
For Americans who install rooftop solar this means:
The ITC increased in amount and its timeline has been extended. Those who install a PV system between 2022 and 2032 will receive a 30% tax credit. That will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. If you’ve already installed a system in 2022, your tax credit has increased from 22% to 30% if you haven’t already claimed it
The solar+storage equipment expenses included in the ITC have expanded. Now, energy storage devices that have a capacity rating of 3-kilowatt hours or greater are included. This includes stand-alone storage, but pairing it with solar is ultimately the best choice.
The ITC will cut the cost of installing rooftop solar for a home by 30%, or more than $7,500 for an average system. By helping Americans get solar on their roofs, these tax credits will help millions unlock an additional average savings of $9,000 on their electricity bills over the life of the system.
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