Solar panels are becoming more and more popular across the country. It is estimated that by 2024, 2.5% of all homes in the U.S. will have solar installation. There’s a good reason why people are adopting solar panels as their source of energy. Solar panels can provide various benefits, from reducing your carbon footprint to saving you money on your energy bills. In 2005, the federal government began campaigning for cleaner and renewable energy; they did that by promoting solar energy. One incentive to get the country on board was to offer a Solar Investment Tax Credit (CII), also known as the Federal Solar Tax Credit. The tax credit percentage has changed over time since 2006 however it gives home and business owners the opportunity to claim 30% of the total cost of their solar system installation as a deduction from their federal taxes. Who doesn’t like having a little extra money at the end of tax season? In this guide, we’ll go over the important information you need to know about the Federal Solar Tax Credit including how to qualify and claim the tax so you can save more money on your solar system.
What is the federal solar tax credit?
The Federal Solar Tax Credit is a tax credit for individuals and businesses that install solar panels. You can claim this credit on your federal income taxes during tax season. The credit is 30% of the cost of the installation and is available for both residential and commercial buildings. The credit is available through December 31, 2022. There is no maximum credit amount, but the credit must be taken in the year the system is in service. It is important to note that the ITC will decrease to 26% in 2033 and drop to 22% in 2034. It will end in 2035 unless Congress renews it.
History of the federal solar tax credit?
The Federal Solar Tax Credit, also known as the Investment Tax Credit (ITC), was established in 2006 to encourage the use of solar energy in the United States. The credit is available to both businesses and individuals, and it applies to both solar photovoltaic (PV) and solar thermal systems.
How does it work?
If you are a US homeowner and have solar panels installed for your home, you may be able to reduce your tax bill by claiming the federal solar tax credit. Even though the credit is worth 30% of what you paid for the system, it can’t exceed $2,000 per person. If you owe less tax than this amount, the remaining amount will carry over to next year’s tax return. Note that this is not a refund check; it’s an actual deduction from your income.
How to qualify for the federal solar tax credit?
The solar tax credit is available for both residential and commercial solar installations, and there is no maximum credit amount. To qualify for the credit, the solar panel installation must be in your primary residence or business location.
Am I eligible to claim the federal solar tax credit?
You might be eligible for this tax credit if you meet the following criteria:
- Your solar PV system was installed between January 1, 2017, and December 31, 2034.
- The solar PV system is located at your residence in the United States.
- The solar PV system is under your name.
- The solar PV system is new or being used for the first time. Note that the credit can only be claimed on the “original installation” of the solar equipment.
How do I claim the tax credit?
The federal solar tax credit is available for both residential and commercial solar installations and can be claimed as long as the system is placed in service before the end of the tax year. The credit is claimed on Form 5695.
How do I fill out form 5695?
You can claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). Your solar provider should supply the appropriate documentation and instructions upon request. Here are the steps you need to take to properly claim the credit:
- Download IRS Form 5695 as part of your tax return.
- On part I of the tax form, calculate the credit. File your solar system as “qualified solar electric property costs.” Then, on line 1, enter your project’s total costs as written in your solar contract.
- Complete the calculations on lines 6a and 6b.
- On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
- Complete the calculations on lines 15 and 16. Enter the exact figure from line 15 on your Schedule 3 (Form 1040), line 5.
What does the federal solar tax credit cover?
The federal solar tax credit covers the following items:
- The ITC covers solar PV panels or solar cells, as well as other components of a solar energy system. This includes balance-of-system equipment and wiring, inverters and mounting equipment.
- It also covers storage devices, such as batteries charged exclusively by the solar panels. Beginning in 2023, the ITC will cover stand-alone energy storage that doesn’t charge solar panels exclusively.
- Labor costs for on-site preparation, assembly or original installation are covered under the ITC, as well as permitting fees, inspection costs and developer fees.
- Sales taxes applied to these eligible expenses are also included under the ITC.
- Is the solar tax credit a one-time credit?
No, the solar tax credit is not a one-time credit. It is a credit that you can claim every year for the next 10 years.
- Will the solar tax credit increase my tax refund?
The solar tax credit will not increase your refund, but it can reduce the amount of taxes you owe.
- For How Long Can I Claim the Solar ITC?
You can claim the federal solar ITC even if you don’t owe taxes, but the credit is nonrefundable. That means you can’t get a refund check from the IRS in a year when your tax liability isn’t enough to claim the entire credit. However, if the credit is still in effect next year when you do have enough tax liability to claim it, you can use any unused portions of this year’s credit for next year instead. For example, if you got $500 of solar ITC on your taxes this year and only owe $400 next year, then you can use $100 of this year’s credit on next year’s taxes instead.
- If the tax credit exceeds my tax liability, will I get a refund?
The credit is nonrefundable, which means that you can’t get a refund for the amount of the credit that exceeds your tax liability. However, you can carry over any unused amount of credit to the next year’s taxes.
So, why is this important?
The federal government has been instrumental in increasing the number of solar PV installations in the US. Through tax credits and policies, homeowners, businesses, and tax payers have been able to take advantage of the lower costs of solar energy. While access to solar is still very challenging for some communities, the tax credit has provided homeowners and businesses with an opportunity to take advantage of this renewable energy source. Renewable energy is the future, and if there is a way to save yourself money while making the transition to solar, you should take every opportunity available.
These days, there are so many resources available to help you understand everything you need to know about solar panels and how to claim them during tax season.
- First and foremost, the most reliable source of information regarding the Federal Solar Tax Credit would be the Internal Revenue Service. Specifically, they have a page with some of the most popular questions in regard to the Federal Solar Tax Credit. Check out their site here: www.irs.gov.
- Intuit Turbo Tax is another great resource for understanding the types of homes and buildings which qualify for the tax as well as detailed information about the Form 5695 that you will need to fill out in order to claim the credit.
- You can view updated information on the current status of the ITC under their Database of State Incentives for Renewables and Efficiency entry on “Residential Renewable Energy Tax Credit” at www.dsireusa.org.
- Lastly, The U.S. Department of Energy (DOE) Solar Energy Technologies Office (SETO) held a video Questions and Answers in September of 2022 in which they discussed the recent policy changes in the Inflation Reduction Act. You can watch the recording and read the Q&A here: energy.gov.