Solar panels are an expensive investment but can provide substantial savings over time with many environmental benefits compared to electricity generated by fossil fuels. The government incentivizes the public to use renewable resources with tax credits and rebates, reducing the overall price. The federal Residential Clean Energy Credit is one of the most significant tax credits. Learn more about the credit, your eligibility, and how to apply.
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Key Points
- The federal Residential Clean Energy Credit can reduce the total cost of solar by 30% when you purchase your system.
- You must fill out IRS form 5695 to apply and claim the credit on your income taxes.
- The credit appears on your next filed tax return and can be carried over for five years.
What is the solar tax credit?
The Residential Clean Energy Credit is a federal solar incentive offsetting the cost of solar equipment by 30%. You must meet the eligibility requirements and apply to receive the incentive. The credit could reduce or cover the amount you owe the government for income taxes.
The solar tax credit is not an upfront discount on your solar system and will not be applied at the time of purchase. It is your responsibility to claim the credit when you file your taxes. Solar installers and tax professionals can help make sure you apply correctly. The IRS can also provide additional support if you choose to file your taxes yourself.
According to the Lawrence Berkeley National Laboratory, the average solar panel system in the U.S. costs $31,558. Applying the federal solar tax credit saves over $9,467, reducing the total cost to $22,091 before additional state and local incentives. While you have to upfront the total amount, you will save a third of the price on your income taxes.
The credit applies to solar systems purchased (cash or loan) from the beginning of 2022 through 2032. In 2033, the credit decreases to 26%, then 22% in 2034. Unless renewed again by Congress, the credit expires in 2035.
How the solar tax credit works
Understanding tax credits can be difficult. SaveOnEnergy does not provide tax advice, but we are here to break down the information. The following are key details to know about the federal solar tax credit.
Tax liability is the taxes you owe based on your income and capital gains. Tax credits from the government subtract from the amount you owe. To receive the entire solar tax credit, you must owe the same amount of money in taxes. If you do not owe the same in taxes as your qualifying credit in the year of installation, you can roll over the amount for up to five years.
There is no limit on taxpayer income, so all income brackets are eligible. Tax credits differ from tax deductions: a credit reduces the amount you owe; deductions reduce your taxable income.
For example, if you purchase a $20,000 solar panel system in 2023, you are eligible to receive a tax credit worth $6,000. If you only owe $2,000 in taxes, you can only receive $2,000 of the $6,000 credit that year. The remaining amount can go towards your next tax payment. As a nonrefundable credit, you can only receive as much of the credit as you owe, so you must have enough tax liability to receive the total value.
If you have little or no tax liability, the Residential Clean Energy Credit will not be as beneficial as it would be for someone with a high tax liability. Installing solar is still a great option to reduce electricity bills and save money over time with green energy, but you may want to consider different options such as a lease or Power Purchase Agreement (PPA).
Solar tax credit eligibility
You must meet the following requirements to qualify for the federal solar tax credit.
- Ownership. You must own the solar system on your primary or secondary residence. Those who own a solar system typically make a cash purchase or finance through a solar loan. You cannot claim the credit if you sign a solar lease or power purchase agreement (PPA).
- New system. Only new solar purchases being used for the first time qualify. You cannot claim the credit if you bought a home with an installed solar system. The credit can also be applied to the purchase of solar batteries, labor costs, and inspections. Solar batteries must have a minimum capacity of three kilowatt-hours (kWh).
- Installation date. Your solar system must be installed between January 1, 2022, and December 31, 2034.
- Certification. The solar panel system must meet your state’s technical requirements and pass all inspections.
Contact your solar installer or tax professional to confirm your eligibility.
How to apply for the solar tax credit
Follow these steps to apply if you installed a solar panel system and determined you are eligible for the federal solar tax credit.
- Documentation. Gather documents, including a certification from your solar manufacturer stating the equipment meets efficiency standards and an invoice from your solar installer displaying the total costs for the system, including installation.
- Complete IRS Form 5695. Fill out the tax form providing the necessary information about your solar system and the amount of credit you’re claiming. Follow the IRS-specific instructions for line-by-line details.
- Submit tax return. Fill out and submit your taxes through an online service or tax professional. Claim the solar tax credit on your taxes.
- Explore other solar incentives. Apply for state and local government solar incentives and rebates.
Powering your home with solar energy offers many financial and environmental benefits. Make the most of the solar tax credit when you find top solar panel brands and the best solar companies with SaveOnEnergy resources.
Frequently asked questions
Yes and no. You can only claim the credit if you live in the rental property for part of the year and rent out while you’re away. The credit is reduced to reflect the amount of time you spend living at the property. For example, if you live in a vacation home for six months out of the year, you can claim 50% of the credit. On a $20,000 solar panel system, the full 30% credit is $6,000. You can claim 50% for a $3,000 partial credit.
Yes. Solar loans and cash purchases are eligible for the solar tax credit because you own the solar system. PPAs and solar leases are not eligible.
Yes. The solar credit can be applied to the purchase of energy-saving improvements on your home, houseboat, mobile home, condominium, or apartment.
Yes. If your tax liability is less than the credit, the remaining credit can be used over the next five years.
No. The solar tax credit is nonrefundable, meaning you will not receive a refund of the credited amount. For example, if you owe $1,500 in taxes and your total credit is $2,000, you are only credited for the $1,500. The remaining $500 from the solar tax credit can be used the following year to pay for tax liabilities. Consult a tax professional on your specific situation.