Federal Solar Tax Credit Explained

Solar tax credit extended to 2034

As of August 2022, the U.S. Congress extended the Residential Clean Energy Credit, previously called the Investment Tax Credit (ITC), to 2034. The credit also increased from 26% to 30%. If you buy solar panels, the federal government will deduct 30% of the total cost from your federal taxes. Anyone who bought solar panels since the beginning of 2022 is eligible.

The residential solar tax credit will drop to 26% in 2033 and 22% in 2034. Unless Congress renews the credit, it will expire in 2035.

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What is the solar tax credit?

You can qualify for the 30% federal tax credit when you purchase and install solar panels on your primary or secondary property. This tax credit has many names, including the IRS solar tax credit, solar ITC, or investment tax credit. Congress renewed the Residential Clean Energy Credit as part of the landmark climate bill, the Inflation Reduction Act.

Discover how the tax credit can help you save on your 2023 taxes, what you need to qualify for it, and how to apply.

History of the solar tax credit

The tax credit emerged as part of the 2005 Energy Policy Act under former President George Bush’s administration. The original legislation provided a 30% tax credit on the cost of any solar system. In 2020, the credit dropped to 26%. In August 2022, the Inflation Reduction Act raised the tax credit back to 30% for another 10 years.

The cost of residential solar panels has declined since the launch of the federal tax credit. According to the Solar Energy Industries Association (SEIA), solar panel costs have dropped by 40% in the last decade. Thus, the value of the tax credit in 2023 is even greater than in the previous years.

Solar ITC by Save On Energy

Qualifying for the solar tax credit

Many types of homes qualify for the solar tax credit, including single-family homes, mobile and manufactured homes, apartments, and condominiums. Houseboats and cooperative apartments may also be eligible for the tax credit.

You can claim the credit for properties you own but rent out if you live there for a part of the year. In this case, the percentage you can claim will depend on the time you live in your rental property each year. For example, if you live at your rental property for half of the year and rent it out the other half of the year, you can claim 50% of the tax credit.

Solar customers who lease their system or enter a power purchase agreement (PPA) with a third-party solar owner are not eligible for the tax credit. You can only qualify for the credit if you own your solar energy system. Therefore, the company leasing the panels to you can claim the tax credit.

Tax credit requirements

• You installed, or will install, a solar panel system between January 1, 2017, and December 31, 2034.
• The solar system is installed on your primary or secondary residence.
• You own the solar system without a lease or PPA.
• You invested in a portion of a community solar project, and the energy it generates is credited against and does not exceed your home’s electricity usage.
• The solar system is new or installed for the first time. For example, you cannot qualify for the tax credit if you bought a home with an existing solar system.

Solar panels aren’t the only equipment that qualifies for the credit. You can use the 30% tax credit for solar batteries, labor and permitting costs, and system components, likeinverters, wiring, batteries, and racking equipment, lowering your total cost.

Applying for the solar tax credit

To claim the tax credit, complete form 5695 and return it to the IRS. For a detailed explanation, read our helpful guide on how to apply for the credit. The IRS provides a printable worksheet with instructions to calculate your expenses and limitations as well as instructions on how to complete the form:

• IRS form 5695
• How to fill out IRS form 5695
• Printable worksheet with instructions for IRS form 5695

Tax professionals and online tax software like Turbotax will also provide this form. You can find other helpful instructions online, including YouTube videos detailing instructions on how to fill out form 5695. There is no extra cost to apply for the federal tax credit other than the ordinary fees you might incur from getting your taxes done and mailing in forms. Once you’ve submitted your taxes, you should hear back about the credit status in the standard time it takes to receive your federal tax return.

Even after receiving the tax credit for your new solar panel system, savings will continue to roll in over time. Residual savings can add up, thanks to the low electricity rates solar owners enjoy. By going green and powering your home with solar energy, green electricity rates can lower your monthly electricity bill for years to come.

How to claim your IRS solar tax credit

Now that you know how to enjoy the federal tax credit, it is crucial to understand how you will receive your credit from the IRS. Since it’s a tax credit, the IRS won’t send you a check for the money you spent. You will receive your savings through a credit on your federal taxes. You will receive a refund if you pay more federal income taxes than your anticipated credit. SaveOnEnergy is not a tax service. Consult your local tax professional to learn more about claiming the solar tax credit.

Some solar installers are making it even easier to claim your tax credit by bundling solar purchases like solar panels and batteries. The solar installer will help you calculate your anticipated tax credit and provide the necessary sale documentation.

You cannot apply the tax credit to your state taxes. If you owe federal taxes but in a lesser amount than your credit, you will only receive a credit up to the amount you owe. Fortunately, the federal tax credit can carry over to the next tax year. If you previously met the criteria for the tax credit and need to claim it, you can file an amended tax return for last year to get your tax credit.

Tax credit carryover in 2023

If you want to claim the solar tax credit, you must do so for the same year you install a solar system. If you purchased solar panels at the end of 2022, but workers didn’t finish the installation until January 2023, you will claim the credit on your 2023 tax return.

So, what if the value of the credit is more than you owe in income taxes? While you can’t use the tax credit to receive money back from the IRS, you can roll the tax credit back one year and carry it forward for up to five years. For example, if you didn’t owe federal taxes last year, you can still claim the credit on this year’s tax return. And if the credit is more than you owe in federal taxes, you will receive the difference in the next tax year until you fully claim the credit.

Let’s say you have a credit of $3,000 and owe $2,500 in taxes. The extra $500 from the credit would roll over into the next tax year. You wouldn’t have to pay anything in the current tax year and will receive a $500 credit on next year’s taxes.

Tax credit cost savings

The solar tax credit has helped customers save on the cost of solar panels and fueled the growth of the renewable energy market. According to the SEIA, “Since the ITC was enacted in 2006, the U.S. solar industry has grown by more than 200x.” By taking advantage of the tax credit this year, you can join over half a million homes and businesses that have moved toward greater energy independence, encouraged job creation in the solar market, and saved on their energy bills.

The tax credit can make installing solar panels a strategic investment, but it won’t mean getting your solar energy system for free. You will still have upfront or monthly payments, depending on whether you finance your system, buy it outright, or lease your solar panels.

If you’ve been thinking about joining the thousands of people who already benefit from solar energy, using the tax credit in 2023 is a great way to lower the cost of a solar system. The average solar panel system costs approximately $31,558, making the 30% tax credit worth more than $9,400.

The solar tax credit is a federal incentive for solar energy systems, so you can claim it regardless of which state you live in. Find out if your state offers extra solar incentivesor rebates to maximize your savings.