How does the federal solar tax credit work?
Renewable energy incentives reduce your tax bill
The solar investment tax credit (ITC), also called the federal solar tax credit, allows qualifying property owners to get a tax credit for 30% of the cost to install a solar energy system on their federal taxes for systems installed between 2022 and 2032. The credit drops to 26% in 2033 and 22% in 2034.
Solar panel costs have decreased dramatically in the last 20 years, but the ITC can still save individuals and businesses a great deal on their federal taxes. If you are considering installing a solar panel system or have recently installed one, it's important to know how this credit works, if you qualify and how to claim it on your taxes.
- The 30% federal solar investment tax credit (ITC) will be reduced to 26% in 2033 and 22% in 2034 before expiring at the beginning of 2035.
- The ITC is applied directly to your tax payment (it’s not a taxable income deduction).
- You must own your solar energy system in order to receive the ITC, though it’s fine if you’re financing the payments.
- Any type of home is eligible for the ITC, including mobile homes, condos and houseboats.
How solar tax credits work
The tax credit is a reduction in an individual’s or business's tax liability based on the cost of the solar property. It’s a nonrefundable tax credit, meaning you won’t get more back than the amount you owe in taxes.
As of 2023, the solar ITC is a 30% federal tax credit.
Residential solar power projects built in 2020 and 2021 are eligible for a 26% federal tax credit, while projects built from 2022 until 2032 are eligible for a 30% tax credit. Solar energy systems built on or before Dec. 31, 2019, were eligible for a 30% federal tax credit. The residential federal tax credit expires after 2034.
Commercial solar projects with construction start dates of 2022 and later are eligible for the 30% federal ITC until 2033, but the expiration of the credit after 2033 is determined by an “applicable year,” which is defined as the later of 2032 or the year the treasury secretary determines there has been a 25% or more reduction in annual greenhouse gas emissions from power production in the U.S. compared with 2022.
The commercial credit lowers to a maximum of 22.5% in 2034 (or two years after the applicable year), 15% in 2035 (or three years after the applicable year) and 0% in 2036 (or four years after the applicable year).
Homeowners who purchase a newly built home with a solar energy system are eligible for the ITC the year they move into the house if they own the solar system. Those who lease a solar energy system or who purchase electricity through a power purchase agreement (PPA) are not eligible for the ITC — the company that leases the system or offers the PPA collects the credit.
Anyone wishing to claim the credit should first consult with a tax professional to ensure that they are eligible. It's smart to speak with an advisor before making a major investment that you intend to claim on your taxes.
Kelly McCann, an attorney at a law firm that specializes in real estate and construction law in Portland, Oregon, said these tax credits can be a huge bonus for taxpayers — when they understand how they work.
“I find consumers are confused as to the difference between a tax credit and a tax deduction," he said. "A tax credit offers a dollar-for-dollar reduction in the amount of income tax the taxpayer would otherwise pay.”
McCann offered the following example:
- Tax credit: If you receive a $1,000 tax credit, your federal income taxes will be reduced by $1,000.
- Tax deduction: If you get a $1,000 tax deduction, your reportable income will be reduced by $1,000, and your taxes will drop as a result of this reduced taxable income. So, if you’re in the 32% tax bracket in this scenario, you’ll likely save $320 on your taxes.
“Suffice it to say, tax credits are better for the taxpayer than are tax deductions,” McCann said.
How to claim the solar tax credit
Those who are eligible and who wish to claim the credit should file IRS Form 5695 with their tax return. Part I of the form calculates the credit. The final amount is listed on the 1040 form. Individuals who failed to claim the credit when they were supposed to can file an amended return later.
Residential solar energy investors claim this tax credit under Section 25D, while commercial solar investors claim it under Section 48. Individuals claim the residential tax credit on their personal income taxes, while businesses that claim the credit do so on their business taxes.
History of the solar investment tax credit
In the early days of solar energy, residential systems were far more expensive than they are now. By many homeowner standards, however, they’re still expensive today. For example, in 2009, it cost $8.50 per watt to install solar panels; the current cost per watt, as of publishing, is about $2.40 to $3.50 before the federal tax credit is taken into account.
This previous point-of-entry cost into the world of renewable residential solar power dramatically limited the number of homeowners who could take advantage of solar for their homes.
The solar investment tax credit was established by the Energy Policy Act of 2005, which established standards for renewable fuels, mandated an increase in the use of biofuels and established renewable energy-related tax incentives.
Under this law, the original policy was set to expire at the end of 2007. However, the solar ITC has been so popular (and successful at promoting solar panel installation on residential properties) that its expiration date has been extended multiple times.
The federal solar tax credit was most recently extended by the Inflation Reduction Act, which was signed into law in 2022.
Most recently, the residential solar tax credit was extended until 2034, with the amount of the tax credit dropping from 30% to 26% in 2033 and 22% in 2034. The credit is currently set to expire at the beginning of 2035.
Today, solar systems are far less expensive due to changes in the industry and the manufacturing of certain parts that make up the solar system. Solar panels, lithium batteries and inverters are all far less expensive to make and buy now than they were in those early days.
It's projected that the price of these products will continue to fall for several more decades. If the federal solar tax credit continues to be extended, it's unclear how these falling prices will impact the tax credit overall.
Are there other solar energy incentives?
In addition to the federal ITC, there are other incentives available to people going solar, including the following:
- Utility company incentives: Local utility companies often offer incentives to get homeowners to purchase home solar power systems. Some companies subsidize the cost of installation or offer rebates, depending on the amount of energy a system produces.
- State solar rebates: State governments can also offer cash rebates for installing solar panels. These rebates often help reduce the cost of installation by 10% to 20%.
- State solar tax credits: Some states also offer tax credits to encourage residents to purchase solar panel systems. If this is true in your state, you may be able to claim both your state’s tax credit and the federal ITC.
Other incentives may include subsidized loans, tax exemptions and solar renewable energy certificates (SRECs). Before purchasing a system, talk to your local solar panel supplier about your options — it likely knows about the incentives available in your area.
Solar tax credit FAQ
If the solar tax credit exceeds my tax liability, will I get a refund?
The solar tax credit is nonrefundable, which means it cannot result in a refund if the individual's tax credit exceeds their liability. Instead, the leftover amount can be carried over to the following year.
For example, if you owe $1,500 in taxes and your tax credit totals $2,000, then the amount you owe is subtracted from the tax credit, and the remaining $500 will be credited to your taxes the following year. This is sometimes called “rolling over.”
What is the difference between a tax credit and a tax rebate?
A tax credit is only used to offset a due balance, while a tax rebate is an amount paid to the taxpayer.
Do other clean energy incentives I get affect my federal tax credit?
Typically, tax credits from the state do not affect your federal tax credit and vice versa. However, a large state tax credit could affect the overall taxable income from the state, which would affect your federal tax return. This means that the amount you claim for your state tax credit will be taxable on your federal tax return.
It's important to work with a tax professional who can help you determine the best way to navigate these complex issues so you can receive the maximum benefit from your solar system.
Do rental properties qualify for the solar tax credit?
The residential tax credit does not allow you to claim solar installation costs on a rental property. However, there are some important caveats to take into consideration when determining whether a solar tax credit can be applied.
Individuals can claim the solar tax credit if they live in the house for part of the year and use the house as a rental when they're not present. If the house is a vacation home, for example, and the homeowner lives in the house 25% of the year, they can claim 25% of the credit.
Rental properties may also qualify under Section 48 as a business tax credit. Again, it's important to work with a tax professional to determine eligibility for your solar system. Your advisor can help you determine if your property qualifies you for a tax credit and the best way to apply the credit to your annual taxes.
How much longer is the solar tax credit available?
The solar tax credit is currently available at a rate of 30% through 2032, then at 26% for systems installed in 2033 and 22% for systems installed in 2034. The residential tax credit is set to expire in 2035.
Homeowners who installed a solar energy system in 2020 or 2021 are eligible for a 26% tax credit, and systems installed on or before Dec. 31, 2019, are eligible for the 30% federal tax credit.
However, these tax credits have been routinely extended since the first credits were implemented in 2005, so it’s possible the credit may be extended beyond 2034.
Can you claim the solar tax credit twice?
Generally, homeowners can only claim one tax credit per solar system. It might be possible to claim the credit again if you install panels on another property. Tax regulations are complicated, so it’s best to ask a professional for advice about your specific situation.
Are owners of condos and mobile homes eligible for the solar tax credit?
Almost any U.S. residence — whether it’s a house, a mobile home, a condominium, a manufactured home, a houseboat or a cooperative apartment — may be eligible for the ITC.
The new-construction home I bought last year came with solar panels; can I get the credit?
You can claim the credit as long as the builder didn’t already claim it (the credit belongs to the homeowner, so the builder shouldn’t have). Contact your builder for a reasonable allocation of costs in order to claim your credit.
Can I claim even if I finance my solar installation project?
You can claim your solar project for the tax credit even if you take out a solar loan — as long as the contract requires you to pay for the full cost of the system.
Bottom line: What to know about federal solar tax credits
The federal solar tax credit is a win for any qualifying individual or business installing a solar system on their property. The tax credit helps offset the cost of the system and can make renewable energy far more affordable and attainable to individuals who would like to live a more sustainable lifestyle.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- U.S. Department of Energy, “Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics.” Accessed April 29, 2021.
- Energy Star, “Federal Income Tax Credits and Other Incentives for Energy Efficiency.” Accessed April 29, 2021.
- Solar Energy Industries Association, “Solar Investment Tax Credit (ITC).” Accessed April 29, 2021.
- Marketplace, “Tax Credit and Tax Rebate.” Accessed April 29, 2021.
- Ballotpedia, “Energy Policy Act of 2005.” Accessed April 29, 2021.
- Turbotax, “Federal Tax Credit for Residential Solar Energy.” Accessed April 29, 2021.
- Energy Sage, “How Solar Panel Cost and Efficiency Have Changed Over Time.” Accessed May 3, 2021.
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