The U.S. federal government increased the Solar Investment Tax Credit (ITC) to 30% in August 2022, and the increase (from 26%) applies retroactively to any eligible projects installed earlier in 2022. Read on to learn more about federal solar tax credits.
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Solar tax credit extended and increased. The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022. This reconciliation bill extends the expiring Federal Solar Investment Tax Credit until 2034 and increases its value to 30% for residential solar installations until 2032.
First ever climate bill. With unified support from Senate Democrats, the Inflation Reduction Act (H.R. 5376) includes wide-ranging measures to reduce carbon emissions and tackle climate change. Under the new rules, homeowners can claim 30% of the cost of a home solar installation as a tax credit until 2032. Thereafter, the credit steps down to 26% in 2033 and 22% in 2034.
No maximum. There’s no maximum amount you can claim for your project, meaning it’s a good idea to maximize your installation to future-proof your energy needs.
How does the federal solar tax credit work?
Let’s work through an example.
Imagine you install a rooftop solar array in August 2022 for a total cost of $12,000. When you file your tax return for 2022, you can claim the ITC for $3,600. Let’s say you had a total tax liability of $4,000 in 2022. With the ITC, you would only owe $400, a reduction of $3,600 in taxes overall.
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What if you had a lower tax liability than the amount of your tax credit? Let’s say, for example, you only owed $1,000 in taxes for the whole year. In this case, you would claim a tax credit of $1,000 for 2022, pay no taxes, and carry the remaining $2,600 to 2023. If you had a tax liability of $1,000 again in 2023, you would again claim the tax credit for the full amount owing and carry the remainder ($1,600) to 2024 and beyond, until the full credit is claimed.
In short, the federal solar tax credit can reduce the cost of your home solar installation by 30%. So, for a $12,000 installation, you may only pay $8,400, assuming you have the tax liability to make use of the full credit. While this isn’t a refundable tax credit, anyone who has already overpaid their tax installments or paycheck withholding amounts for the year would get a refund come tax time. To make the most of the credit, you’ll want to have some tax liability in the year you install the system, otherwise, you can’t make use of the incentive. That might mean reducing payments to or delaying paying into an Individual Retirement Account (IRA) until the following year.
Note that the federal solar investment tax credit is a non-refundable credit. This means if you have less tax liability than the full credit, you won’t get a check from the IRS for a refund. However, if you tend to owe only a small amount at tax time because you pay tax throughout the year, you should get a refund check after filing and claiming the ITC.
The solar ITC is mainly thought of as a residential tax incentive, but it also applies to some commercial properties and large-scale utility solar farms. The Solar Energy Industries Association (SEIA) estimates that since the ITC was enacted in 2006 it has helped the U.S. solar industry grow by more than 10,000%. This means hundreds of thousands of jobs and billions of dollars created in the U.S. economy.
How to claim the federal solar tax credit
Time needed: 45 minutes.
How to claim the federal solar tax credit, step by step.
- Claim the federal solar tax credit on your annual federal tax return
You claim the federal solar tax credit on your annual federal tax return through the Internal Revenue Service (IRS). Most CPAs will be versed in this credit, and can help you prepare your return, or you can follow these steps to get started yourself.
- Download IRS Form 5695
To get started, download IRS Form 5695 as part of your tax return.
- Part I is where you calculate the credit
Use Part I of the form to calculate your credit.
- Write in the total cost of your project
The solar electrical system is filed as “qualified solar electric property costs,” and on line 1 you write in the total cost of your project as invoiced on your solar contract.
- Complete the calculations on lines 6a and 6b
Next, complete the calculations on lines 6a and 6b.
- Use the Residential Energy Efficient Property Credit Limit Worksheet
Then, on line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
- Final step
The final step is complete the calculations on lines 15 and 16 and then enter the figure from line 15 on line 5 of your Schedule 3 (Form 1040).
Your solar installer should supply all the documentation you need and offer guidance on claiming the credit. You can also consult a tax accountant to make sure you’re filing your return correctly, especially if you’re also claiming solar renewable energy credits (SRECs) and other incentives.
Do you qualify for the federal solar tax credit?
If you’re relying on the ITC to make solar affordable, read the small print before you sign a contract for home solar. The Office of Energy Efficiency & Renewable Energy (EERE) lists the following criteria for qualifying for the ITC:
- Full ownership of the solar electrical system – leases or solar power purchase agreements (PPAs) don’t qualify for the tax credit
- An installation date between January 1st, 2022, and December 31st, 2032
- Must be original equipment, not repurposed or reused parts of an existing system
- The system must be situated on the taxpayer’s primary residence or secondary home in the U.S., OR at an off-site community project if the electricity generated is credited against your home electricity consumption (but does not exceed it).
The tax credit covers the solar panels or solar cells and additional equipment such as wiring, inverters, and racks. The ITC also now covers solar batteries or other energy storage devices as long as they’re charged exclusively by your solar panels. You can still claim this tax incentive even if you activate your storage in a later tax year than the solar system itself, as long as it’s prior to the expiry of the ITC.
The ITC also covers labor costs and fees for permitting, inspection, and developers, as well as any sales taxes associated with these costs.
You may also qualify for the ITC if you buy a newly built home with installed solar, as long as you own the system outright. This is a great way to go solar as it offers a chance to deliberately design your new home (such as angling the roof a certain way) to make the most of any sunshine.
You can also claim the tax credit if you install solar on an investment property that you own outright and rent. This is filed under the business tax credit, rather than the homeowners tax credit, however, which means a different step-down schedule (talk to your accountant if this is your situation!).
Note, you won’t qualify for the ITC if you lease solar equipment. This is why it makes a lot more sense to buy your solar electrical system outright if you can afford it. When you lease a system, the company that owns the equipment gets the tax credit, not you. And, while installed solar increases property values by around 4%, leasing may make it harder to sell your home, because buyers won’t always want to take on a long-term lease.
When does the federal solar ITC expire?
The federal ITC has been extended and increased as of August 16, 2022. A 30% tax credit is now available until the end of 2032 for residential solar installations.
The federal solar tax credit was set to expire at the end of 2024, with some caveats. Under the old law, the ITC was:
- 26% for projects where construction starts in 2022
- 22% for projects where construction begins in 2023
- Set to expire for residential solar projects after December 31st, 2023
- Set to drop permanently to 10% for commercial projects beginning in 2024
Commercial and utility-scale projects that start construction after August 16, 2022, are now subject to the new law. This changes project eligibility significantly, involving requirements regarding labor and materials. Projects that began before the Inflation Reduction Act was signed into law may still qualify for the 22% or 26% ITC.
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Renewable energy advocates long pushed to have the Investment Tax Credit (ITC) extended or even restored to 30%, which was the original rebate when first introduced in 2005.
SEIA successfully advocated for extensions to the federal solar tax credit, including an initial delay of the phasedown, which helps extend the credit to December 2022. The ITC will remain at 30% until the end of 2032, then step back down to 26% in 2033 and 22% in 2034.
Solar incentives and rebates by state
Looking for your state’s solar incentive program? We keep a running list of state solar rebate and incentive programs below. Select your state to see the latest benefits.
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