Are Solar Tax Credits really useful?

In addition to the enormous financial and social benefits of solar power, the energy tax credits have been a power booster for homeowners to switch to cleaner energy sources. But are these solar tax credits really that useful? Can they truly cut down on your installation costs? If so, how much? Read this blog to find out all the answers.

Since the last decade, a decline in the prices of residential solar panels and the installation process has been witnessed, making solar power dreams more affordable for homeowners than ever. Still, the overall cost of solar project investment falls out of the financial bracket of an American household, with an average solar panel installation costing around $17,430 to $23,870.

However, the good news is that with the help of federal, state, and local solar rebate programs and tax credits, homeowners can reduce their total solar panel installation cost. Thus, start producing solar power from day one and save on electricity bills. 

But that is just the tip of the iceberg. There are some further important things to know about them.

Let’s study the details of the solar tax credits and its benefits for homeowners in more detail.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction on your taxable income that you would otherwise be paying to the government. It is different from tax exemption or tax deductions. For instance, let’s say you claim a $2500 federal tax credit on your solar system. This would reduce your federal tax income by $2500. Thus, directly impacting your yearly tax bill. 

These tax credits have helped zillions of homeowners to go solar with their initial upfront investment savings and save more on their utility bills.

What is the federal solar tax credit?

In order to encourage more homeowners to switch to solar, the U.S. government has started incentivizing families in the form of solar investment tax credits (ITC) via the Energy Policy Act of 2005. It was later, in 2006, enacted as the Residential Solar Energy Credit by the federal government and thus also called the federal tax credit. Since then, the U.S. solar industry has taken a massive turn, with an average yearly growth of 50%.

Furthermore, the federal credits allow homeowners to claim 30% of their total solar panel installation project cost on their federal tax income for the systems installed between 2022 and 2032. For example, if your solar installation project cost you $17,000, then with the federal tax credit, you will be able to reduce the final expense by 30%, meaning you will save $5100.

Earlier, it was 26% for the PV systems installed between 2020 and 2021. According to the Inflation Reduction Act of 2022, the federal solar tax credits will again be reduced to 26% for systems installed in 2033 and 22% for systems installed in 2034. And in 2035, the ITC will expire unless Congress plans to renew it.

How does the federal solar tax credit work?

Anyone can avail of federal solar tax credits, be it a householder, condo owner, or cooperative HC member, as long as they purchase the solar panel system and own it. The credits won’t be applicable in the case of solar leasing.

The next important thing to know is that in order to claim the federal credits on your taxable income, you need to turn on the system. For instance, let’s say your installation process gets completed in December 2023, but if you complete the final inspection stage and obtain the necessary permission to operate (PTO) from your local utility in January 2024, you can only claim credit for the 2024 tax year.

Moreover, you can claim the residential clean energy credits only once in a lifetime. So, if the tax liability is less than the federal credit value, then the remaining amount will be passed on to the following year, and you won’t get any cash refund. This will continue for 5 years.

For instance, your solar panel installation system cost you $17,000, so you will owe $5100 on federal tax income, but your tax liability is $5000. So, in this case, the remainder of the credits ($100) will be applied to the federal tax income of the next year.

Who is eligible for the federal solar tax credit?

According to a report by the Office of Energy Efficiency and Renewable Energy (EERE), a homeowner needs to meet the following criteria in order to be eligible for federal solar tax credits:

Installation Date: If you are a taxpayer and your solar panel system is installed between January 1, 2006, and December 31, 2034, then you can avail of the federal credits. However, the percentage rate will vary based on the year you installed the system.

Ownership: The credits can be claimed only by homeowners who own the system. Any kind of other solar financing options such as solar panel leasing or PPA in which you purchase the power generated by the system under this agreement won’t be applicable for federal credits.

Original Installation: Since the federal credits can be claimed only once by homeowners and on new installations, Any kind of reusing or repurposing of the existing PV system won’t be eligible for these solar tax credits.

Residence types: Homeowners, condo owners, mobile homeowners, houseboats, cooperative house corporations, manufactured homes in the United States, all of these residences are eligible to claim federal solar tax credits.

Location: The PV system must be installed at your primary residence. If the net power production does not exceed the average need for consumption, you may utilize the system for an off-site community project and avail of the credits.

What does the federal solar tax credit cover?

If you are a homeowner who has recently installed a solar panel system and is eligible for federal solar tax credits, then you can claim them on the following grounds:

Solar panels: The credits are applicable to solar panels or solar cells.

Additional solar equipment: The tax credits cover solar batteries with a capacity rating of at least 3 kilowatt hours (3 kWh), inverters, mounting hardware, wiring, and the balance of the system.

Labor costs: This includes the site inspection, taking necessary approvals and permits from the authorities, on-site preparation, installation, and technician fees. 

Sales tax: Some states entirely waive the sales tax of the solar panel installation equipment, while in some states, federal tax credits cover the sales tax on eligible PV installation equipment.

How do I claim the federal solar tax credits?

Federal tax credits will be claimed during federal tax income return filing with the Internal Revenue Service (IRS). For clear instructions, take the help of your installer. They will provide you with proper documentation and guidelines for applying for solar tax credits. Usually, the solar contractors provide these documents before you finalize them so that you have clarity on the upfront credit value.

Following are the step-by-step instructions to claim the solar ITC:

• Download and file IRS Form 5695 as part of your tax return.
• Next, calculate the total solar tax credits from Part I of the form.
• File your system as “qualified solar electricity property costs.”.
• On line 1, enter your total solar panel installation project cost as mentioned in your solar contract.
• Complete the calculations on lines 6a and 6b.
• Calculate the tax liability limitations if there are any using the ITS’s Residential Energy Efficient Property Credit Limit Worksheet.
• Complete the calculations on lines 15 and 16.
• On your schedule 3, line 5, enter the same figure from line 15.

And it’s done. For first-timers, we would recommend seeking the help of a tax professional or your solar contractor to accurately file the credit claim.

How much can you save with federal solar tax credits?

As mentioned earlier, the average cost of a solar panel installation falls between $17,430 and $23,870. However, according to the survey of 2023, the average amount spent by homeowners on panels was between $15,000 and $20,000. Now, when you apply the 30% federal solar tax credits, you will end up paying between $10,500 and $14,000.

And with the aid of state and local tax credits and incentive programs, you can further lower the solar project cost depending on which state you are currently living in and what your requirements are.

What is the role of state tax credits?

State tax credits work in a similar manner as federal solar tax credits. The only difference is that these are applicable for state taxes and have no effect on federal taxes. 

Also, each state has a different policy on providing tax credits for solar panel installation systems. For instance, California, Maryland, Massachusetts, and New Jersey provide the best incentive programs and tax credits for the PV installation system.

What are the effects of additional state and local solar incentives on tax credits?

In addition to federal and state solar tax credits, there are additional solar rebate and incentive programs run by the state government and local utility providers. All these collectively further reduce the overall cost of solar panel installation for homeowners. Following are they:

State solar incentives

In addition to the 30% federal ITC, several states offer additional solar incentives to homeowners so as to encourage them to switch to solar. Some of the common forms of these programs are tax credits, rebates, and renewable energy certificates.

To know more about the state-specific solar tax credits, rebates, and incentive programs, visit the Database of State Incentives for Renewable Energy and Efficiency.

Local utility solar rebates

In some areas, the local utility providers also provide the solar rebate and incentives to encourage homeowners to go solar. They have different ways to do so. For instance, some local authorities provide one-time subsidies to install panels, while others offer rebates based on how much electricity your system generates, also called performance-based metrics.

Tax exemptions

Installing solar panels can increase your home value by up to 4%, which might be a concerning thing for taxpayers. But the good news is that many states offer property tax exemptions, which means the state will waive off the added tax value due to the solar power system.

Net Metering

Net metering is another great program offered by utility companies and is required in 41 states as of now. Net metering allows you to export the excess electricity generated by the solar power system and transfer it to the utility grid for additional bill credits. This way, you can generate an additional source of income as well as utilize the excess electricity in a power outage situation.

Final Words

You have already witnessed the difference between the pricing of solar project costs with and without solar tax credits. These credits are a great way for homeowners to reduce their yearly taxable income and the overall cost of solar panel installation. 

By taking advantage of the cumulative leverage of tax credits, solar incentives, and rebate programs at the federal, state, and local levels,  households can make their solar dreams more affordable and come true within a short span of time.

So, if you are considering going solar, now is the best time to electrify your future and save big on your utility bills by availing maximum solar tax credits as long as they are applicable.

We hope you found this blog informative and understood the benefits of solar tax credits.

So, what are you waiting for? Go to your nearby solar panel installer in your area and have a consistent income stream tied with the solar electricity while also availing the tax benefits.