If you’re considering going solar, you have most likely heard about the federal solar tax credit. The investment tax credit (ITC), which is frequently called the federal solar tax credit, allows you as a homeowner to deduct 30% of the cost of installing your solar system from your federal taxes.
Your system must be placed in service during the tax year. There is no cap on the value of your tax credit.
The investment tax credit (ITC) was established by the Energy Policy Act of 2005, which was created to help transition the United States to a renewable energy economy. The investment tax credit has proven to be extremely popular and increased the adoption of solar energy in this country.
Fewer than 30,000 homes in the United States had solar systems in 2006 and that number skyrocketed to over 1 million homes thanks in large part to the federal solar tax credit. The tax credit was originally supposed to expire in 2007, but it has been extended multiple times due to its success in driving the adoption of solar energy in this country.
In 2022, the federal solar tax credit was extended, so homeowners can deduct 30% of the cost of their new solar system.
Homeowners who purchase and own their residential solar system are eligible for the federal solar tax credit. The tax credit is not valued at a set dollar amount and is valued at a percentage of what you spent to install your solar system.
For example, if you spend $25,000 to install your solar system in 2022, you will receive a 30% deduction which amounts to $7,500. You can then claim a tax credit of $7,500 that will reduce the total amount of your income taxes by $7,500.
The federal solar tax credit can be rolled over to a future year, if the taxes you owe are less than the credit you earned. In the previous example, a homeowner received a $7,500 tax credit. If their total federal taxes owed for that year are $5,000, they can then roll over the remaining $2,500 of their tax credit to the next year and use their remaining tax credit to lower their federal income taxes in a subsequent year.
There is no limit on the federal solar tax credit, so taxpayers in all income brackets are eligible.
The following costs and expenses are covered for homeowners who take advantage of the tax credit:
There are other solar incentives for homeowners such as rebates, state programs, and other tax credits. Any additional incentives available to you will depend on where you live.
If your utility company provides rebates for installing a solar system, that rebate would be subtracted from the cost of your solar system before you calculate your federal solar tax credit.
In the previous example, a homeowner spent $25,000 to install their solar system and received a 30% deduction when they file for their tax credit
30% x $25,000 = $7,500 federal solar tax credit
If that same homeowner lives in an area where their utility company offers a $1,000 rebate for installing solar panels, that rebate will be applied to the cost of their solar system. Their tax credit would now be calculated as:
30% x ($25,000 - $1,000) = $7,200 federal solar tax credit
The cost for that homeowner’s solar PV system would now be $1,000 less, so their tax credit would be $300 less since the tax credit is valued at the percentage of what it cost to install your system.
The homeowner in this example still pays $1,000 less for the cost of their installation. In most cases, rebates or any other subsidies provided by your utility company to install a solar system for your home are excluded from your federal income taxes.
Rebates from your state’s government will typically not reduce the amount of your federal solar tax credit. If you live in a state that provides a one-time $1,000 rebate for installing your solar system, this will not be applied to the total cost amount you will use to calculate your federal tax credit. We will refer to our original example of a homeowner who spent $25,000 for their solar system installation to demonstrate this:
30% x $25,000 = $7,500 federal solar tax credit
The amount of your federal tax credit will remain the same, since receiving a rebate from your state’s government will not be applied to the total cost that is used to calculate the amount of your tax credit.
If your state provides state tax credits for installing your solar system, this will not decrease the size of your federal solar tax credit. If you do live in a state that provides state solar tax credits, your taxable income on your federal tax returns will be higher, since you will have less state income tax to deduct.
Some states require utility companies and energy suppliers to procure a certain percentage of electricity from qualified renewable energy resources in that state. Utility companies can meet these requirements by purchasing Renewable Energy Certificates (RECs) from the owners of a solar system.
If you receive money from your utility company or another buyer for selling renewable energy certificates, it will most likely be considered taxable income. This will increase your gross income, but it will not reduce your federal solar tax credit.
You can claim the investment tax credit (ITC) for your home’s solar system when you file your annual federal tax return. Before you begin to file your tax return, we recommend you compile all of the receipts, documents, and forms required.
The IRS provides instructions on their website to help you complete these tax forms. Here are links for you to download the instructions for IRS Form 1040 and IRS Form 5695.
Once you have all of the necessary receipts and forms, you will then take the following steps to claim the investment tax credit (ITC):
If you are eligible for the federal solar tax credit, then you will file IRS Form 5695 with your tax return to claim your tax credit. Part I of Form 5695 calculates the amount of your tax credit. The final amount will be listed on your 1040 form.
Homeowners who claim the residential tax credit will do so on their personal income taxes.
The U.S. Department of Energy Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics is a great resource for homeowners who have gone solar. The guide can help answer your questions about your eligibility for the tax credit, expenses you can include, rebates, and other tax incentives.
The Database of State Incentives for Renewables and Efficiency (DSIRE) is a comprehensive database that homeowners can use to search for and find solar energy incentives in their individual state and across the country.
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