How to Use Tax Credits for Switching to Solar Energy Easier

Setting up solar panels can be costly–the average price for a complete set of components is around $16,000! It's an investment that shouldn't be taken lightly. However, with its long-term benefits like energy savings and solar tax credits, it may just prove to be worth your while.

Home solar power systems can save you significant money in the long haul, and several government-funded incentives incentivize homeowners to invest in renewable energy. From federal, state, and local levels, these rebates may even allow you to earn extra cash for installing an eligible system.

We cover the top solar tax incentives available to make the switch to solar energy easier.

What Is a Tax Credit?

Tax credits are a powerful tool that can help you reduce your taxable income and directly impact your annual tax bill. A dollar-for-dollar reduction of the income tax you owe, a tax credit can reduce the amount of tax you owe or increase your tax refund. They also differ from deductions and exemptions.

How Does the Federal Solar Tax Credit Work?

When you purchase a solar photovoltaic (PV) system during the tax year, you are eligible for a Federal Solar Tax Credit that you can claim on your federal income taxes for a percentage of the cost of the system.

In 2021, the ITC provided a 26% tax credit for solar systems installed between 2020 through 2022. In August 2022, the federal tax credit was extended and will now offer 30% for systems installed in tax years 2022 through 2032. So, when deciding whether to install solar panels, factor in a 26% to 30% discount.

One crucial fact to remember is that the tax credit cannot be claimed more than once. Additionally, if your taxes owed are less than what you earned as a credit, it will automatically roll over onto the following year's taxes. Lastly, don't forget that this tax deduction does not qualify you for any refunds — no matter how much or little of the credit amount is used.

Federal Solar Tax Credit Eligibility

You can qualify for the ITC if your solar system is new or used for the first time between January 1, 2006, and December 31, 2023. Unless Congress renews the ITC, it expires in 2024.

Other requirements include the following:

• Your solar PV system was set up during the time frame between January 1, 2023, and December 31, 2034.
• The solar PV system is located at your residence in the United States. It doesn't have to be your primary residence, but you must have spent some time there during the year.
• The solar panel system must be new or is being used for the first time.
• Whether purchased with cash or financing, you must own solar panels. Leasing solar panels does not make you eligible.

What Does the Federal Solar Tax Credit Cover?

If you are a homeowner that recently installed a solar panel system after January 1, 2023, you are eligible to claim a federal tax credit that covers 30% of the following: 

• Solar panels cost
• Solar equipment costs like inverters, wiring, and mounting hardware
• Labor costs for solar panel installation, including fees related to permitting and inspections
• Solar power storage equipment costs like solar batteries. Storage devices must have a capacity rating of at least 3 kilowatt-hours (kWh).
• Sales taxes paid for eligible solar installation expenses (though some states waive sales tax on PV system equipment)

How to Claim Solar Tax Credit

Following your solar power installation, you can only once claim the solar tax credit. Therefore, you should speak to your solar provider to supply the proper documentation and instructions, which include the following:

1. File IRS Form 5695 as part of your tax return
2. In Part I, calculate the credit of the tax form
3. File your solar system as "qualified solar electric property costs." 
4. On line 1, enter your project's total costs as written in your solar contract
5. On lines, 6a and 6b, complete the calculations
6. On line 14, calculate any tax liability limitations using the IRS's Residential Energy Efficient Property Credit Limit Worksheet
7. On lines 15 and 16, complete the calculations
8. On line 5, enter the exact figure from line 15 on your Schedule 3 (Form 1040)
9. You can also carry over any unused amount remaining on your tax credit that you could not claim in a single tax year.

How Do Other Incentives Affect the Federal Solar Tax Credit?

Solar customers can capitalize on various incentives to decrease the overall expense of their system installation, including electric utility rebates and renewable energy certificates from states, along with state government rebates and tax credits. These reductions are sure to yield lower filing amounts come tax season!

State Solar Incentives

Making the switch to solar energy can be easier with incentives from states and Puerto Rico in addition to the federal ITC. Tax credits, rebates, and renewable energy certificates - are all standard incentive options. States such as California, Texas, Minnesota, and New York have many solar incentives readily available for homeowners wishing to make this environmentally friendly transition.

Solar incentives differ significantly from state to state. Each state is home to many agencies offering solar financial services. Consult the database of State Incentives for Renewables for specifics.

State Tax Credits

State tax credits can help offset the cost of installing solar panels, just like the federal ITC. However, the amount of credit varies significantly from state to state. In most cases, these credits will stay the same as your federal tax credits.

State tax credits can be paired with the federal solar tax credit to maximize your savings.

State Government Rebates

Some states offer upfront rebates for installing a solar power system. They are typically only available for a limited time while funds are available, so research rebates in your state to get in on the incentive before it runs out. A state government rebate can reduce your solar costs by 10% to 20%.

Solar Renewable Energy Certificate

A Solar Renewable Energy Certificate (SREC), sometimes called a Solar Renewable Energy Credit, is another type of state-level solar incentive. After you install your solar power system and register it with the appropriate state authorities, they will track your system's energy production and periodically offer you SRECs as a benefit. You can sell your SREC to your local energy utility (or another buyer) to provide a payment that's typically considered taxable income.

Other Solar Incentives

Here are some other solar tax credits that are important to know about:

Local Utility Rebates

Local utility providers reward homeowners who install solar power systems with generous financial incentives. Depending on your region, you may qualify for bill rebates based on the energy produced by the system or one-time subsidies to help cover installation costs. Those incentive programs that provide credits per kilowatt hour generated are referred to as PBIs, which stand for performance-based incentives.

Subsidized Loans

When acquiring a solar panel system, check with your regional utility and non-governmental organizations for potential subsidized financing opportunities. Reaching out to an installer in the community familiar with local incentives can provide additional guidance regarding which programs may help you fund your purchase.

Tax Exemptions

You may be eligible for various tax credits and exemptions by installing a solar system. Even though these systems will inflate your property value, some states, and municipalities will not factor them in when assessing property taxes--which means your property tax bill will stay the same.

Some states also have programs to ensure all solar power system component purchases are exempt from state sales taxes, which could save you hundreds of dollars when you install your system.

How SmartSolar Can Help

Combining these various solar tax credits and other financial incentives can save you money on your solar power system installation. While installing one requires a significant amount of money upfront, these programs will significantly reduce the system's overall cost. At SmartSolar, you can answer a few questions about your solar system site, and experts will deliver a detailed quote to your email and work with you to switch to solar for 2023.

With the solar market, SmartSolar makes it simple for you to access budget-friendly and professional energy solutions that align with your lifestyle. By switching to solar power, customers save an average of $149 per month on their utility bills - what a way to enjoy substantial savings!

SmartSolar only collaborates with the cream-of-the-crop solar installers who are trained to provide you with crystal clear, easy-to-comprehend information. That way, no unpleasant surprises await, and you can rest assured that your product is top-quality.

If you want to save money on your next electricity bill and obtain leveraged tax credits for 2023, then learn more on SmartSolar.