What You Should Know About the Federal Solar Tax Credit Extension
Don't miss the incredible opportunity to take advantage of the federal solar tax credit—now is a perfect time! If you need to familiarize yourself with the federal solar tax credit, this is your chance to discover what incentives apply and how long their benefits will last.
Now let’s explore everything you need about the Investment Tax Credit (ITC).
Benefits of the Federal Solar Tax Credit
With the federal solar tax credit, you can get a 30% rebate when you buy and set up a solar power system. The Inflation Reduction Act recently passed legislation that ensures this generous incentive stays in effect until 2032.
Furthermore, your financial savings will still apply even if you install before 2022—talk about an incredible opportunity for those looking to save on their utility bills and lower their carbon footprint with renewable energy sources.
The 30% tax credit will be available through 2033 and will again be reduced to 26% before it drops to 22% and then goes away entirely.
There's no cap on the amount of money it can save. It is important to remember that the timeline for commercial systems and their ability to receive a tax credit differs from residential timelines.
Review the Solar Investment Tax Credit (ITC) Timeline
The ITC was first set up by the Energy Policy Act in 2005, and it was supposed to end at the end of 2007. Yet, due to its effectiveness and sheer popularity among homeowners, businesses, organizations, and more.
Congress has extended it multiple times since then, most recently through 2034, via the Inflation Reduction Act (IRA). This extension allows an impressive 30% tax credit for all renewable energy owners!
Here’s a complete timeline of the Investment Tax Credit:
- 2016 – 2019: Installing a system was estimated to cost 30% less with the ITC.
- 2020 – 2021: Homeowners and businesses that installed cutting-edge systems were rewarded with a generous 26% credit.
- 2022 – 2032: Bypassing the IRA and increasing the ITC, homeowners can now deduct up to 30% of their system cost from their federal taxes. Businesses that invest in solar systems before 2025 will be rewarded with a generous 30% tax credit - courtesy of the U.S. Department of Treasury! This incentive may continue past that year, depending on further decisions made by this department.
- 2033: The ITC rate is decreasing to 26%.
- 2034: Those who install a new system will receive a 22% credit.
- 2035: Unfortunately, the ITC is scheduled to fade out for good, and there are no current government incentives for residential solar energy systems as of 2021.
As you can see, solar is sticking around for the next decade and is only expected to grow as an industry. Wondering if you are eligible?
Am I Eligible for the Federal Solar Tax Credit (ITC)?
To be eligible, there are a few requirements that must be met:
- You must own your home. Renters are unfortunately not eligible for this offer.
- Your system will be installed between January 1, 2022- December 31, 2034 (please note that the tax credit percentage will drop as outlined in the timeline above)
- To qualify for the solar tax credit, it is essential to invest in your solar panels. Unfortunately, if you opt to lease a system, you will not be eligible for the incentive.
- The solar PV system is new. The tax credit cannot be claimed on used systems
How Does the Solar Tax Credit Work?
The average cost to install solar panels is $16,000, depending on the state and type of panels. The solar tax credit is a non-refundable credit worth 30% of the gross system cost of your solar project.
That means that if the gross system cost is $16,000, your tax credit would be $4,800 ($16,000 x 30% = $4,800).
It is essential to recognize that the solar tax credit does not automatically come in the mail when you set up a solar panel system. In reality, it's a tax credit that can help you get the most money back or pay the least amount of tax at the end of the year.
If you installed a solar system in 2023 and the city inspector approved it, you may be eligible for a tax credit when you file your federal income taxes in 2024. If the amount of tax owed exceeds this sum, you can take full credit. On the other hand, if it's lower than your tax credit, you can carry over any uncollected credits into future years.
Finally, there is no income limit on the ITC program; taxpayers of all levels may be eligible.
What’s Covered by the Investment Tax Credit?
Homeowners who take advantage of the 30 percent tax credit can expect to see the following covered:
- Solar panel costs
- Installation labor costs, including permit, inspection, and developer fees
- Any additional solar equipment, such as inverters, wiring, and mounting hardware
- A home battery that is charged by your solar panel system
- Sales taxes on eligible expenses
Consider these top solar installation companies if you're thinking about going solar.
When Can I Claim the Solar Tax Credit?
If you don't owe any taxes this year, the IRS will not send you a refund or credit. The 30% investment tax credit is also non-refundable, yet if tax credits remain in effect (with current laws, that's until 2034 for residential systems), they can be carried over to the next year, even if there is no tax liability this time around.
Before making any official moves, we suggest that you talk to a tax expert to make sure you have all the facts and understand the situation.
Can I Use the Tax Credit Combined With Other Incentives?
Aside from the ITC, there are other solar incentives like rebates and state-sponsored programs that, depending on where you live, you can use together to lower the total cost of going solar.
Here are some important things to know about combining solar incentives with the federal ITC:
- Rebates from your utility company: In most cases, utility company subsidies are omitted from income taxes. To accurately determine the tax credit owed, one must subtract the utility rebate from their system cost.
- Rebates from the state: Typically, these tax rebates won't reduce your federal credit amount.
- State tax credit: Installing solar panels can benefit you with a state tax credit that will not interfere with any federal credits. Remember, since the state tax credit increases your taxable income on federal returns, it may limit the amount of taxes taken away from you.
- Payments from renewable energy certificates: Generating income through selling renewable energy certificates can be lucrative. Although your gross income will likely increase due to this endeavor, rest assured that it won't affect any applicable tax credits. Find out if you are in an SREC market.
Calculating the cost of going solar is complicated, and adding other financial incentives and tax credits to your estimate might confuse things.
For the most comprehensive and up-to-date information about current state incentive levels, see the Database of State Incentives for Renewable Energy (DSIRE).
Frequently Asked Questions
To help clarify, here are some frequently asked questions about the ITC.
Is the Solar Tax Credit a One-Time Credit?
The ITC is a generous one-time tax credit, but if you cannot use the entire amount this year, don't worry. You can carry over any remaining balance to the upcoming filing season!
For example, if you owed $5,800 in taxes and had earned a $6,000 solar tax credit that same year, you would owe no additional taxes for that particular fiscal period.
Additionally, you could reduce next year's taxes with the leftover $200 credit.
Will the Solar Tax Credit Increase My Tax Refund?
The solar tax credit can't directly enhance the amount of your tax refund. However, it will apply to your liability toward the IRS. In other words, you'll be able to reduce or eliminate any money owed.
How Do I Receive My Tax Credit?
To get your solar ITC extension and start saving money, you must fill out the right paperwork. After figuring out if you're eligible, you'll need to fill out IRS Forms 5695 and 1040 when you file your income taxes.
Fortunately, these forms include step-by-step instructions for simple completion.
You can save significantly on your solar power system installation by taking advantage of the various solar tax credits and financial incentives available.
Take the SmartSolar Homeowner Quiz to find out if solar panel installation is right for you.