Federal Solar Tax Credit Guide for Homeowners (April) (2024) (2024)

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The solar investment tax credit is a credit you can claim on your federal income taxes. The ITC is not a tax deduction or a tax refund. Instead, it reduces what you owe in taxes. The credit is currently valued at 30% of your total solar photovoltaic (PV) system cost.

The federal solar tax credit is available to any U.S. homeowner, condo owner or cooperative housing corporation member, as long as you own a solar panel system. You cannot claim the credit if you are leasing solar panels.

You can claim the credit for the tax year you turn on your system. For example, if the installation is completed in December 2024 but you can’t book an inspection and gain permission to operate (PTO) from your local utility until January 2025, you can only claim the credit for 2025.

You can only claim the federal solar tax credit once. If the taxes you owe are less than the value of the credit, you can roll over the remainder towards future income tax burdens.

For example, if you install a solar energy system worth $19,000, you’ll owe 30% ($5,700) less on your federal tax return. If your tax liability is less than $5,700, the remainder of the credit will be applied to your federal income tax liability the following year — you won’t be refunded the remaining credit amount in cash.

As outlined by the Inflation Reduction Act of 2022, the ITC will decrease to 26% in 2033 and drop to 22% in 2034. It will be canceled completely in 2035 unless Congress renews it.

You claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). Your solar provider can supply the proper documentation and instructions for applying for the credit. Most reputable installers typically provide this documentation along with the quote or contract you sign before installation so you know the value of the credit up front. We have listed the essential steps in claiming the credit below:

1. Download IRS Form 5695 to file as part of your tax return.
2. On Part I of the tax form, calculate the credit. You’ll file your solar system as “qualified solar electric property costs.” So on line 1, enter your total system and installation costs as outlined in your solar contract.
3. Complete the calculations on lines 6a and 6b.
4. On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
5. Complete the calculations on lines 15 and 16. Be sure to enter the exact figure from line 15 on your Schedule 3 (Form 1040), line 5.

If you are filing for the first time, we recommend you consult a tax professional and your solar provider to ensure you correctly claim the ITC.

The Office of Energy Efficiency & Renewable Energy (EERE) states the following criteria to determine federal solar tax credit eligibility:

• Date of installation: You are a U.S. taxpayer who installed a solar system between Jan. 1, 2006, and Dec. 31, 2034.
• Original installation: Your solar project is new. Homeowners can only claim the credit on the original installation of solar equipment, not the repurposing or reuse of an existing system.
• Location: The solar system is located at your primary residence or secondary home in the U.S. You may also use your system for an off-site community project if the electricity generated does not exceed and is credited against your home’s electricity consumption.
• Ownership: You own the solar PV system. You cannot claim the credit if you are leasing or in an agreement to purchase electricity generated by the system, including a solar power purchase agreement (PPA).
• Type of residence: Homes, mobile homes, houseboats, condominiums and cooperative apartments are all qualifying residences for the ITC.

Can I Claim the Federal Solar Tax Credit On My Rental Property?

If your solar system installation is on a rental or vacation property that you own, you can only claim the ITC if you live at that property for at least part of the year. Even then, you can only claim the portion of the credit that reflects how much time you spent living there.

For instance, if the solar panel system on your rental property cost $20,000, then the full solar energy tax credit of 30% would be worth $6,000. However, if you live at that property 50% of the time (say six months out of the year), you’d only be eligible for $3,000, or 50% of the full credit value.

Does the Date I Install My Solar Panels Affect How Large My Credit Is?

The year that you install your solar panels can affect how large of a tax credit you earn:

The following expenses are eligible for the federal solar tax credit, according to the EERE:

• Solar panels: The credit covers solar PV panels or PV solar cells.
• Additional equipment: The credit covers other solar system components, including the balance-of-system equipment and wiring, inverters and other mounting equipment.
• Batteries: The ITC covers storage devices, such as solar batteries, charged exclusively by your solar PV panels. Coverage extends if you install battery storage with your solar system, add batteries to an existing system, or as of January 2023, install stand-alone energy storage.
• Labor: Labor costs for on-site preparation, assembly or original solar installation are covered. This includes permitting fees, inspection costs and developer fees.
• Sales tax: The credit also covers sales tax applied to eligible expenditures.

According to our 2023 survey of homeowners with solar, respondents paid an average of $15,000 to $20,000 for their solar panel systems. When you factor in the 30% federal solar tax credit, the average cost drops to $10,500 to $14,000. Local and statewide incentives can also further lower the cost of going solar.

That said, the total cost of your solar panel system will vary depending on your system size and provider. Although a larger system will cost more, your tax credit will also be higher.

Tax credits, net metering and tax exemptions are three of the most valuable solar incentives offered on a state or local basis. These incentives can be used in tandem with the 30% federal solar tax credit to increase your savings. You can use the Database of State Incentives for Renewables & Efficiency (DSIRE) to find rebates and state tax credits are available in your ZIP code.

Tax Credits

Some states have a statewide tax credit that you can apply in addition to the federal solar tax credit. These states currently include Arizona, Colorado, Hawaii, Massachusetts, Maryland and New Mexico.

Policies for eligibility and claiming state credits vary, so make sure to look on your local government website and speak with your solar installer to learn more.

Net Metering

A total of 41 states currently require net metering. If you live in one of these states, you can export excess energy generated by your solar panels back to the utility grid for bill credits. Some states, like Idaho and Texas, do not have mandated statewide net metering, but many utility companies still offer a program.

Tax Exemptions

Most states offer property tax exemptions for solar equipment, meaning you won’t have to pay taxes on the value added to your property when you install solar panels. Many states also offer sales tax exemptions for solar equipment. Your solar installer can help you fill out and submit any paperwork required for tax exemptions.

Garrett Nilsen, the deputy director of the U.S. Department of Energy’s Solar Energy Technologies Office, recommends the following when it comes to solar incentives:

“Incentives can vary across the country, so it’s important for homeowners to understand what they’re eligible for on the federal and local levels before going solar. An experienced local installer should be able to assist you in claiming any state and local incentives, as well as the ITC.”

Learn more about the solar incentives offered in your state and how to apply:

If you live in a state that offers its own solar tax credit, you can redeem both the federal and state tax credits in full. For example, if your state offers a tax credit worth 10% of your solar system cost, you can still redeem the 30% federal tax credit.

Note that you will have to pay federal taxes on the value of your state tax credit.

Installing solar panels is worth it for most homeowners. A solar panel system typically generates clean energy for 25 years or more and saves the average U.S. household $1,346 on energy bills annually.

Although solar is still a significant investment, the cost has decreased by more than 50% over the last decade — and the 30% federal solar tax credit further reduces how much you’ll pay. Many utility companies and state governments also offer solar incentives, including tax credits, rebates and net metering. You can combine these incentives with the federal solar tax credit to maximize your savings.

However, if you live in a state with few solar incentives, you may save less over the lifetime of your panels. Other factors like the climate and your roof’s features can affect whether or not solar is worth it for you. Because every solar array and roof is unique, your solar installer will survey your home to determine if solar panels are suitable for you.

We recommend reaching out to a solar professional today to help you decide if solar is worth the investment.

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