Looking to save money on your energy bills? Well, you’re in luck! With the solar tax credit, you can dramatically reduce your costs when installing a solar system on your home.
For the last decade, the solar tax credit has helped millions of Americans offset the cost of going solar. But navigating the ins and outs of the credit—and using it to its full advantage—can seem like a daunting task.
That’s why we’ve put together this ultimate guide to everything you need to know about the solar tax credit. Inside, we’ll take you through all aspects of the credit from eligibility requirements to how to maximize your savings. By the end of this article, you’ll be an expert at making the most out of this important financial incentive. So let’s get started!
What Is the Solar Tax Credit?
You’ve heard a lot about the solar tax credit, but what is it exactly? Well, the Solar Tax Credit, officially called the Residential Clean Energy Credit, is a tax credit that allows you to deduct up to 30% of the cost of your solar energy project from your federal taxes. This federal tax break is one of the most important incentives for individuals and business owners who are looking at making the switch to solar energy.
Let’s take a look into how you can qualify.
How Can You Qualify for the Solar Tax Credit?
As a homeowner, you’ll want to make sure that you meet all the necessary requirements in order to take advantage of the solar tax credit. To qualify, you must:
- Install a solar energy system on your home.
- Be current on your taxes
- Have enough taxable income to offset the amount of any tax credits associated with installing solar energy systems.
The complete list of eligibility requirements for the federal solar tax credit can be found on the IRS website. With all these boxes ticked, it’s time to start looking into using a solar energy system!
History Of the Solar Tax Credit
It’s no secret that solar energy has become an important part of the clean energy conversation, so it makes sense that it has a tax credit too. Here’s a brief overview of the history of the solar tax credit.
The Energy Policy Act of 2005
The Energy Policy Act of 2005 created the US Federal Solar Tax Credit program and the Residential “25D” Investment Tax Credit equal to 30% of qualified solar expenses.
The 2008 Emergency Economic Stabilization Act
This “bank bailout” extended the Investment Tax Credit for eight years, through 2016, and eliminated the $2,000 monetary cap on the credit amount.
The American Recovery and Reinvestment Act (aka Stimulus Bill)
This piece of legislation broadened definitions of qualified expenditures and technologies.
The 2015 Legislation
This delayed the sharp step-down (30% to 10%), and set up a more gradual phase-out schedule (26%-22%) in 2020-2021.
2020: Scheduled Fade-Out
The ITC value was set to 26% in 2022, and 22% in 2023 before being scheduled to expire in 2024. This makes now a great time for those looking for opportunities to take advantage of this program.
The Inflation Reduction Act (2022)
The tax credit is renamed the Residential Clean Energy Credit. The credit was increased to 30% and the program was extended through 2034.
What Qualifying Costs Are Covered by the Solar Tax Credit?
Now let’s talk about what qualify as costs for the solar tax credit. In general, you’ll be able to get a credit for the purchase or installation of solar panels, mounting equipment, inverters, wires, and battery storage systems. You can even get a tax credit for parts and labor associated with installing and maintaining your system.
To determine how much of your solar-related costs can be written off—you need to go through in detail what qualifies for the credit. Here’s a look at some of the common qualifying products:
- Solar Panels: Photovoltaic (PV) cell modules that absorb sunlight and convert it into energy used to fuel household appliances.
- Mounting Equipment: Mounts designed to secure the PV modules in place—including racks, rails, flush mounts, screw piles and more.
- Inverters: Components used to transform direct current (DC) electricity generated by the PV cells into alternating current (AC) electricity suitable for powering household appliances.
- Wires: Wires needed to connect the PV modules and components together in your solar installation
- Battery Storage Systems: Batteries used to store excess energy produced by your system during daylight hours until it’s needed at night.
How To Claim the Tax Credit For Solar Panels
Claiming the federal solar tax credit is actually simpler than it seems. Here’s a step-by-step guide:
The first step of claiming the tax credit is to make sure you have enough tax liability that you can use the federal Residential Clean Energy Credit to lower the amount you owe for taxes.
Complete IRS Form 5695
The next step is to complete IRS Form 5695. This form ensures that you are qualified for renewable energy credits and that you’ve installed an eligible system in your home. The form will also ask for details like the installation cost, system performance, etc..
Add The Credits To Your 1040
Once you’ve determined your solar Residential Clean Energy Credit information from Form 5695, you use that total on your Form 1040 to reduce the amount you owe. It’s important to note that the total credit amount claimed can’t be more than your taxes due, so make sure to do your calculations as accurately as possible when filling out this form.
Can You Claim The Solar Tax Credit If You Lease Your Solar Panel System?
No. The reason for this is because when you are leasing the solar company is the one who owns the panels, so they will typically receive the Solar Tax Credit rather than the homeowner. This is typically why most customers are better off purchasing their systems and owning their power production outright. However, there are definitely instances where leasing does make sense. Contact a solar advisor to learn know more.
What Are The Other Benefits to Going Solar?
In addition to reducing your monthly electricity bill and your carbon footprint, you’ll also be helping protect yourself from unreliable and increasingly expensive energy sources (fossil fuels). Plus, solar will increase the value of your home. It’s hard to find a downside, honestly.
So how does this all work? Well, let’s go over some of the additional perks you’ll be getting by taking advantage of the Solar Tax Credit:
When you go solar with the Solar Tax Credit, you are saving money in two major ways: electrically and financially. Not only will you reduce your monthly electricity cost, but with certain local incentives such as rebates and property tax exemptions, you can also save money on other related expenses.
Lower Carbon Emissions
By shifting to renewable energy sources like solar power, your home or business is reducing its carbon footprint. This helps to lower air pollution levels and promote cleaner air quality that affects us all!
Increased Home Value
Another great benefit of going solar is that it adds more value to your property – which can come in handy when it comes time to sell your home or refinance a loan. Studies have shown that homes with solar panels sell faster and for higher prices than those without them in today’s market.
Taking advantage of the Solar Tax Credit is a great way to save money while helping the environment. It’s an investment that pays off now and in the long run. Plus, the credit helps incentivize more people to switch to solar, which is a win for the entire planet.
The Solar Tax Credit has been huge for renewable energy. When the history books are written about the climate crisis, the Solar Tax Credit will be credited as a game-changer in the fight against climate change. It will also be seen as having increased prosperity among ordinary people, all of whom went from renting power to owning power. Be a part of that story now. Go solar today.