The Federal Solar Investment Tax Credit (ITC) increased 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.
Table of Contents
- What the Inflation Reduction Act means for homeowners going solar
- How the Federal Solar Investment Tax Credit works
- Is the new solar tax credit a tax refund?
- Why the Federal Solar ITC matters
- Downsides of the Inflation Reduction Act
- Federal solar tax credit example
- How to claim the federal solar tax credit
- Do you qualify for the federal solar tax credit?
- When does the federal solar ITC expire?
- Federal Solar Tax Incentives FAQ
Solar tax credit extended and increased. The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022. This bill (H.R. 5376) extends the Federal Solar Investment Tax Credit until 2034 and increases its value to 30% for residential solar installations 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.
What the Inflation Reduction Act means for homeowners going solar
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.
Is the new solar tax credit a tax refund?
Unfortunately, no.
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.
If your tax liability doesn’t meet or exceed the amount of the solar installation cost, you’ll miss out on its full value. You won’t be cut a check for the difference.
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.
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.
Federal solar tax credit example
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.
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.
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).
Confused?
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.
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.
Federal Solar Tax Incentives FAQ
Hi SolarGuy,
Congrats on going solar!
The new bill makes things even better for you! If you have the tax liability for a 30% credit, that’s what you’ll get once you file for this year. Basically, your solar installation just got 4% cheaper thanks to the Inflation Reduction Act!
Though it’s not clear yet how loan providers will handle bridge loans, I suspect there’ll be an option to stick with your current prepayment plan (i.e. use what you’d have received as a 26% tax credit) or prepay a bit extra without penalty if you can take full advantage of the 30% tax credit.
So, let’s say your solar installation cost $20k in March 2022 and your loan schedule has a payment due for 26% of that in April 2023. Your tax credit under the old rules would be $5,200, which you’re expected to pay after filing your taxes. With the new bill, depending on your filed income, you may get a tax credit up to $6,000 instead. You could then use that extra $800 to pay off your loan a little faster and save on interest over the full term of the loan.
Note, though, that many folks don’t get a check back, they just owe less come tax time. For instance, if you owe $10,000 on filing, you’d just owe $4,000 under the new rules. You’ll only get a check if you’ve overpaid through instalments throughout the year, i.e., if you’d already paid $10k. Talk to your accountant (obviously!) and you may be able to pay lower instalments until the end of 2022 if you expect to owe less overall come tax time.
Hope that helps clarify things. All in all, the new bill is great news for you and for anyone who already had solar installed in 2022!
If you had a good experience with an installer, let us know who!
Leigh
Hi Ernie,
Great question!
Because the tax credit is associated with the solar installation, you should be able to claim the credit for any new system you install.
However, if a person decided to move their existing solar array (for which they’d already received the credit) to their new home, they wouldn’t be able to claim the credit a second time for reinstalling the same array.
It’s always best to check with your accountant about these things, though!
Leigh
Hi Jose,
Congrats on going solar! That sounds like a big project – did you get batteries installed too? (Always curious!)
As with the old rules, the new rules allow taxpayers to carry any unused credit forward for four subsequent tax years. So, in your case, if you used $4,000 of the credit this year, you could use another $4,000 the next year, then $5,000 in the following two years to use up the whole $18,000.
Talk to your account, obviously, but it may make sense to rejig your finances to give you a bit more tax liability and your spouse (if you have one) less this year or in the next four years, so you can maximize use of that credit. Alternatively, you could consider holding off on other activities that typically reduce tax liability (such as certain payments to retirement funds) for a few years, so your tax liability is higher while the credit can be used.
Hope that makes sense!
Leigh
Hi Philip,
My understanding of the new rules is that you could claim the ITC for adding storage (as long as it’s over 3 kWh capacity), but not for any additional solar panels. If, however, you moved to a new home and installed solar and storage there, you could claim the credit for both the new array and storage.
Definitely talk to your preferred installer/contractor, though. They may see a workaround that can net you a bigger credit.
Leigh