Solar energy is one of the fastest-growing industries in the country, but many people aren’t aware of the tax credits and deductions they qualify for that can help offset their costs when installing panels. If you are familiar with the tax credit, you may be wondering where it stands today, what you are eligible for, and how long you will be eligible to take advantage of the benefits. In this article, we will review the current status as of October 1, 2022.
The Solar Investment Tax Credit (ITC), also known as the federal solar tax credit, now offers a 30% tax break for purchasing and installing a solar energy system. The recent passage of the Inflation Reduction Act (IRA) made the ITC jump back up to 30% in 2022 and is set to extend through 2032. It is important to note that any system installed in 2022 will qualify for the 30% tax credit, even if it was installed before the IRA was passed.
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. The ITC applies to both commercial and residential systems, and there is no cap on the amount of money it can save. Keep in mind that the timeline for commercial systems and the eligibility to receive a tax credit is different from the residential timeline.
Now let’s explore everything you need to know about the Investment Tax Credit (ITC).
Review the Solar Investment Tax Credit (ITC) Timeline:
Originally established by the Energy Policy Act of 2005, the ITC was set to expire at the end of 2007. As a result of the ITC’s popularity and its success in making renewable energy more affordable, Congress has extended it multiple times. Most recently, members voted to extend the tax credit at 30% for 10 additional years through the Inflation Reduction Act (IRA).
Now, homeowners, business owners and various organizations can benefit from the solar tax credit in some form through 2034.
Here’s a full timeline of the Investment Tax Credit:
- 2016 – 2019: The ITC was 30% of the cost of installing a system.
- 2020 – 2021: Homeowners and businesses that installed new systems received a 26% credit.
- 2022 – 2032: The IRA passed and the ITC increased once again. Homeowners who install new systems can deduct 30% of the cost from their federal taxes. Commercial solar systems will be eligible for a 30% federal tax credit through 2025, when the U.S. Department of Treasury will decide whether or not to continue this benefit for commercial systems.
- 2033: The ITC will be reduced to 26%.
- 2034: Those who install a new system will receive a 22% credit.
- 2035: The ITC is currently set to go away completely. There is no federal credit planned at this point for residential solar energy systems starting this year.
DISCLAIMER: The intent of this article is to provide information about the Federal Solar Tax Credit for interested homeowners. It is not intended to serve as official financial guidance. Those interested in installing solar products should use their best judgment and seek advice from a licensed tax professional before making any purchase or investment.
Am I Eligible for the Federal Solar Tax Credit (ITC)?
Your eligibility is based on a variety of factors, here are a few requirements:
- You must own your home or business. Renters are not eligible.
- Your system is installed between January 1, 2022- December 31, 2034 (please note that the tax credit percentage will drop as outlined in the timeline above)
- You must own your solar panels. If you lease a solar system, you cannot claim the credit directly.
- The solar PV system is new. The tax credit cannot be claimed on used systems
Again, we encourage you to consult your tax advisor for details.
How Does the Solar Tax Credit Work?
The solar investment tax credit applies to people who own their solar energy systems. If you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” any remaining credits into future years as long as the tax credit is still available. This is currently set to go through 2034 for residential solar panel systems.
If you sign a lease or power purchase agreement (PPA), someone else owns the system. This means you’re renting the system in order to enjoy the benefits of solar energy, but you don’t own the system and therefore can’t claim the tax credit.
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 fees, inspection costs 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
When (and For How Long) Can I Claim the Solar Tax Credit?
If you do not owe any taxes during the given calendar year, you will not receive a credit or refund check from the IRS. The 30 percent ITC is also not refundable. However, the ITC can be carried to the following year(s) as long as the tax credit remains in effect (currently through 2034 for residential systems). Therefore, if you owe taxes next year but have no tax liability this year, you can still claim the credit. We encourage you to confirm the specifics with a tax professional.
Can I Use the Tax Credit Combined With Other Incentives?
In addition to the ITC, there are other solar incentives like rebates, state-sponsored programs and other tax credits depending on where you live. While some of these financial incentives impact the ITC, others can be combined to reduce the overall cost of going solar.
Here are some important things to know about combining solar incentives with the federal ITC:
- Rebates from your utility company: Generally, subsidies from your utility company are excluded from income tax returns. As a result, the utility rebate would be subtracted from your system cost before you can calculate the tax credit.
- Rebates from the state: These types of rebates usually don’t reduce your federal tax credit.
- State tax credit: Any state tax credit that you receive for installing solar panels will not affect the amount of federal tax credits that you can claim. But, keep in mind that the state tax credit will increase your taxable income on federal returns because you won’t be able to deduct as much of your state taxes.
- Payments from renewable energy certificates: When you sell renewable energy certificates, the income will likely be taxable and increase your gross income. However, it will not impact your tax credit.
Frequently Asked Questions About the Solar Tax Credit
Calculating the cost of going solar is complicated and adding other financial incentives along with tax credits into your estimate might make things even more confusing. Here are some frequently asked questions related to the ITC to help clarify:
How Much is the Federal Solar Tax Credit in 2022?
The federal solar tax credit is 30% of the cost of eligible residential and commercial systems installed in 2022. The ITC will be phased out for residential systems by 2035. If your solar system installation costs you $20,000, your solar ITC will be $6,000.
Is the Solar Tax Credit a One-Time Credit?
The ITC is currently a one-time credit. But, if you can’t use it all when filing your taxes, you may carry over any excess credit to the next year. If you owed $5,800 in taxes but received the $6,000 solar tax credit, you’d pay $0 in taxes for the year you claimed the tax credit. Plus, you can reduce the next year’s taxes with the remaining $200 credit.
Will the Solar Tax Credit Increase My Tax Refund?
While the solar tax credit won’t increase your tax refund, the ITC amount will be applied towards your tax liability, or the money you owe to the IRS.
If you’re ready to go solar and want to find out which benefits and incentives you qualify for, contact us today for a free customized quote.