The Federal Solar Investment Tax Credit is now 30% until 2032. Here is what you need to know, plus we’ve answered quite a few reader questions in the comments section.
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Gaining unified support from Senate Democrats, the Inflation Reduction Act (H.R. 5376) was signed into law by President Joe Biden on August 16th, 2022.
What the Inflation Reduction Act means for homeowners going solar
The reconciliation bill increases the Federal Solar Investment Tax Credit (ITC) to 30%, something solar advocates have long called for. The bill also extends the credit to 2032, adding a decade of life to the credit originally slated to expire at the end of 2023.
Under old legislation, the Federal Solar Investment Tax Credit was set to drop down from 26% in 2022 to 22% in 2023. Under the new law, homeowners will be able to claim 30% of the cost of a home solar installation as a tax credit until 2032. After that, the credit steps down to 26% in 2033 and then 22% in 2034, expiring thereafter.
Claiming the solar tax credit retroactively. If you’ve just installed solar and are kicking yourself for not waiting, don’t worry. There’s a provision in the bill that allows anyone who installed residential solar in 2022 prior to the bill’s passing to claim the 30% credit retroactively.
Battery storage is included. The bill also allows homeowners to apply the 30% credit to energy storage. This includes battery storage systems installed after a home solar array. If you’ve been anxiously waiting on the availability of batteries, worrying that the credit would drop down before yours could be installed, this new bill provides welcome relief.
How the Federal Solar Investment Tax Credit works
Homeowners who install solar can look forward to a 30% tax credit on their 2022 taxes. This means that someone who installs, say, a $20,000 home solar energy system could claim a $6,000 tax credit when filing taxes in 2023.
This doesn’t mean homeowners get a check for $6,000, though. Instead, the tax credit works to reduce the amount of tax owed in the year of installation and subsequent years if the full amount isn’t used at once. So, let’s imagine a homeowner installs a $20k solar array in late 2022.
When filing their taxes for the year, they owe $10,000 in total. By claiming the ITC of $6,000 (30% of $20k), this homeowner would only owe $4,000 in taxes for 2022.
As another example, if a homeowner installed a $12,000 solar array in early 2022, they could claim a tax credit of $3,600. If they only owed $2,000 in tax for 2022, this homeowner could carry over the remaining credit of $1,600 to a subsequent year.
Find out more about how to claim the Federal Solar ITC here.
Is the new solar tax credit a tax refund?
Solar advocates had hoped that the reconciliation bill would include a refundability clause for the Federal Solar Investment Tax Credit. The final bill doesn’t include this provision, however, meaning that homeowners without a significant tax liability cannot claim the tax credit as a cash refund.
As per the current law, if your tax liability doesn’t meet or exceed the amount of the solar ITC, you’ll miss out on its full value.
The good news is that the credit (or any unused amount) can still be rolled over to a subsequent year. This means that some homeowners will be able to better plan their tax installments and overall liability to take greater advantage of the credit.
The bill does include a direct pay provision, though, which will allow some solar developers to get more out of the tax credit. Under the new rules, a solar energy developer with little or no remaining tax liability can treat the credit as an overpayment of tax. This would result in a cash payment refund come tax time.
There are also ‘adders’ to the ITC. These depend on who is installing solar, whether panels and other components are American-made, and where the array will be set up. For some projects, the 30% base rate plus adders could amount to a 50% tax credit, cutting in half the cost of going solar.
Why the Federal Solar ITC matters
The reconciliation bill includes a staggering $360 billion in spending for renewable energy and measures to tackle climate change. Part of that goes towards funding the Federal Solar ITC, which has had a huge impact on the solar industry in the U.S.
This kind of funding helps create hundreds of thousands of green jobs. It also helps establish training programs to help traditional energy sector and manufacturing workers transition into more sustainable professions in renewable energy.
The new law will also help boost solar projects in low- and moderate-income communities, acknowledging and addressing the inequities in green energy infrastructure. This is thanks to bonus tax credits of 10-20% for disadvantaged communities installing solar.
In practice, this could see tax credits of up to 50% for solar installations in some communities of color, rural regions with economic hardship, and other communities shouldering the burden of environmental pollution. That means some homeowners or community solar projects could cut the cost of going solar in half.
The bill also offers an extra 10% tax credit for solar installed on formerly polluted brownfield sites or in areas where the oil, gas, or coal industries previously offered significant employment (but don’t any longer).
Downsides of the Inflation Reduction Act
In addition to not offering the tax refund fought for by some solar advocates, the newly passed bill also includes some provisions that concern environmentalists. For instance, the legislation may actually encourage drilling for fossil fuels by offering continued subsidies to oil and gas companies.
There’s also a focus on carbon capture and storage, without recognition that burning fossil fuels also releases other types of pollution.
The original Build Back Better proposal was designed to help America meet President Biden’s original pledge of reducing carbon emissions by nearly 50% by 2030. Compromises were made to get every Senate Democrat on board with the bill, allowing Vice President Kamala Harris to cast the tiebreak vote.
As it stands, Senate Democrats calculate that the Inflation Reduction Act of 2022 will reduce carbon emissions by nearly 40% by 2030.
Final thoughts on the new Federal Solar Investment Tax Credit
The Inflation Reduction Act of 2022 is a landmark piece of climate change legislation. It offers a major shot in the arm for a solar industry beleaguered by supply chain problems and other issues in the last few years. And it’s a hail Mary for all those homeowners who want to install solar panels and claim the federal tax credit but who can’t make the numbers work this year or next.
Delays are common with solar installations, given the scope of these projects and the complexities of designs, permitting, and so forth. In the past, this has meant that some installers were left scrambling to get projects over the finish line before the end of the year, so as to deliver on promises about tax incentives. With this extension of the credit (and increase!), installers and homeowners alike should feel some of that pressure lifted.
Overall, the new Federal Solar Investment Tax Credit, as part of the Inflation Reduction Act, should help solar capacity in the U.S. grow to an impressive 30% of all U.S. electricity generation by 2030.
That represents a huge reduction in carbon emissions and pollution. It also means many more green jobs, and significant energy independence for homeowners and communities suffering with the rising costs of fossil fuels.