How Does the Federal Solar Tax Credit Work?

The federal solar tax credit is an incentive provided by the US government to encourage homeowners and businesses to install solar energy systems. This tax credit can help reduce the upfront cost of installing a solar energy system and make it more affordable for people. 

If you upgrade your home with solar energy equipment between now and 2032, you'll be eligible to receive a nonrefundable federal tax credit for 30% of qualifying expenses—no maximum. 

Solar panels, mounting gear, and even contractor labor costs all count towards this incredible incentive. Don't miss out on this lucrative opportunity. Make the switch to renewable energy and start reaping the tax benefits.

How Much Will Your Solar Installation Cost?

As solar energy keeps getting better and more people use it, prices for this type of clean energy are likely to go down more than ever before.

But other important factors, like where you live, the weather where you live, and even government incentives, may also affect how much money you save on your installation.

Before buying a solar panel system, it's important to know the many things that affect how much it will cost:

1. System size

To figure out how big your solar array needs to be and how much it will cost, you need to know how much electricity you need. Generally, a bigger system with more panels will cost significantly more than one with fewer panels for the same amount of energy produced.

2. Equipment

Buying the cheapest solar panels may be the easiest way to save money on your solar system, but you'll probably save more money in the long run if you buy superior-quality equipment.

3. Roof characteristics

A single roof plane that slopes at a 30-degree angle is an optimal choice for solar installation. However, this does not mean you should disregard the other available options. Though more complex to install and with potentially fewer cost savings due to lower sun exposure, solar can still be beneficial for those who do not have access to such ideal roofs.

4. Labor

Even though they may use the same equipment, the prices of solar companies can be very different. Because installers offer different warranties on their work and have different levels of skill, it is important to find reputable and reliable professionals for your project. By looking for high-quality solar installation companies that have already been checked out, you can be sure of good work and peace of mind.

5. Location

If you want to invest in solar energy, you should know that prices can vary a lot depending on where you live. On average, hotter states will offer a lower cost per Watt ($/W) than cooler regions; however, the system size required for installation might be more significant.

Other important factors that impact your solar savings and vary by location are rebates and incentives, which we’ll cover next.

Take the SmartSolar.org Quiz to Find Out If Solar Panel Installation is Right for You

How does the solar tax credit work?

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 $20,000, your tax credit would be $6,000 ($20,000 x 30%= $6,000).

The solar tax credit is not a check at your doorstep. In actuality, this is an income tax credit that can help you get the most out of your refund or reduce what you owe at the end of each financial year.

If you installed a solar system that costs $20,000 and is approved by the city inspector in 2023, you could receive an incredible $6,000 tax credit when filing your federal income taxes for 2024! If the amount of tax owed exceeds this sum, you can take full credit. On the other hand, if it's lower than $6K, you can carry over any uncollected credits into future years.

Are you eligible to receive the federal solar tax credit?

If you purchased and installed a solar system in your residence between January 1, 2023, and December 31, 2023, and owe federal taxes in the U.S., you are eligible for the tax credit. Leased solar systems are not eligible.

What expenses does the federal solar tax credit cover?

Here are some of the expenses that you are allowed to claim:

• Solar equipment
• Freight shipping costs
• Solar consulting fees
• Professional installation costs
• Electrician fees
• Engineer fees
• Tools bought or rented
• Wiring, screws, bolts, nails, etc.
• Equipment purchased or rented (scaffolding or a man-lift, for example)
• Permitting fees
• Permitting service costs

Depending on the installation you choose, expenses may differ. On the plus side, hiring a contractor is also an eligible deduction.

How do you claim the federal solar tax credit?

To claim the tax credit, you must file IRS Form 5695 as part of your tax return. You'll calculate the credit on the form and then enter the result on your personal tax Form 1040.

Don't forget that the incentive you get for installing solar depends on the year that it is considered to be working. If you have any questions about this tax credit, please seek advice from a qualified professional.

What other rebates and incentives are available? 

Depending on your region, you can take advantage of the federal tax credit in addition to local incentives such as state tax credits, cash rebates, and Solar Renewable Energy Certificates (SRECs) that may add up to reduced savings worth thousands more. 

Moreover, certain exemptions may also be applicable regarding sales taxes on solar photovoltaic (PV) systems and added value for property taxes.

Net metering is another rewarding policy in residential solar energy. It allows you to store your extra solar-generated power in the electrical grid for future use. With net metering, you can be sure that any extra energy produced by your system will not go to waste. 

When you participate in the Net Metering program, you won't receive monthly payments; your utility company will give you bill credits for energy generated by your solar panels. 

Keep in mind that not all states provide net metering. To find out if yours does, see the Database of State Incentives for Renewable Energy (DSIRE).

For example, the popularity of solar power installations has grown quickly in the LA area and across California because the price of solar power is going down and the state requires that 60% of its electricity come from renewable sources.

How will you pay for your solar power system?

There are numerous solar panel financing options will determine your savings level. The greatest potential for saving lies in cash purchases. However, even with a zero-down loan, you can save tens of thousands. 

Solar leases and power purchase agreements (PPAs) require no down payment, but they come at a price: your total utility bill reduction would be 10–30%.

Take the SmartSolar.org Quiz to Find Out If Solar Panel Installation is Right for You

How to maximize your solar savings

In addition to the federal solar tax credit, local rebates and incentives, here are a few tips to help you get the most out of your investment and make sure your solar system is running at its best.

Compare multiple quotes to secure the best deal

When buying something of great value, like solar energy systems, you must undertake thorough research and analysis to locate the right business. By getting quotes from multiple solar companies, you can get better prices and more information about your purchase. This will lead to a high-quality installation at a price you can afford.

Don't ignore smaller installers

It's important to look into all of your solar options, not just the ones from companies with big advertising budgets. 

According to an NREL report, prices quoted by large installers are usually 10 percent higher than those offered by small and mid-sized ones. 

So if you're considering quotes from some of the more prominent installers in the sector, make sure you compare them with local services so that you don't end up overspending on solar energy!

Compare equipment options

Obtaining multiple solar quotes allows you to compare the equipment each installer provides. When it comes to selecting the most suitable solar equipment, there are a variety of elements that come into play. 

Although some parts may have better efficiency ratings than others, investing in high-end gear does not always equate to bigger savings. To identify which system is best for your property, review numerous offers with varying machinery and financing options thoroughly.

Take the SmartSolar.org Quiz to Find Out If Solar Panel Installation is Right for You