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What Federal Tax Credits on Solar Panels Are Available?

Editorial Team
Updated May 17, 2024
Federal Tax Credits

In August of 2022, Congress passed a bill to extend the Investment Tax Credit (ITC), which raised the federal solar credit from 26% up to 30%, and it'll remain in effect until 2032. However, as we move into 2033, this tax credit will decrease slowly - dropping to 26% for solar power systems installed during that time frame, before expiring unless renewed by Congress starting in 2035. There is no maximum amount that can be claimed.

How Much Do Solar Panels Cost?

Solar panel installation for residential properties can vary significantly in cost, depending on the size of your home, its location, and what type of panels you choose. Generally speaking, solar panel pricing ranges from $3,500 to $35,000 - but typically settles at an average expense of around $16K.

Even though it's helpful to know how much solar panels cost, there are a lot of other things that will ultimately affect how much you pay for them. Educating yourself on all the components involved in buying and installing these items is essential. If you're considering going solar, check out this comprehensive guide to financing your solar panels.

This article will cover available tax credits and solar incentives to ease the pain in your wallet.

Everything you need to know about the federal solar tax credit

By going solar, you can take advantage of the Solar Tax Credit and receive a reduction in your income tax. Homeowners can take advantage of the ITC and get a 30% tax credit from the federal government if they buy and install a solar photovoltaic (PV) energy system before 2033. This includes the cost of the parts, the cost of installing them, and any other fees that come up in the year that they are installed and approved by a municipal inspector.

How Does the Solar Tax Credit Work?

With the solar tax credit, you receive a dollar-for-dollar reduction from your income taxes. For example, if your solar PV system costs $20,000 and you can claim 30% of the Investment Tax Credit (ITC), then you will owe $6,000 less in total income taxes for that year; essentially lowering the solar system cost to $14,000.

The current legislation allows for a rollover of the difference between your eligible tax amount and the credited amount for the upcoming year.

Am I eligible to claim the federal solar tax credit?

According to the U.S. Department of Energy, you must satisfy the following criteria to qualify for the 30% solar federal tax credit:

  1. Your solar PV system was set up during the time frame between January 1, 2023, and December 31, 2034

  2. 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

  3. The solar panel system must be new or is being used for the first time

  4. Whether purchased with cash or financing, you must own solar panels. Leasing solar panels do not make you eligible

If you're considering the switch to solar energy, find the best solar companies near you.

Recover Solar Panel Installation Costs Sooner Than You Think

Solar panels liberate you from the electrical grid, empowering your home with energy produced by our sun. By installing solar panels on your residence, you can generate electricity sufficient for most of its needs.

When you think about how valuable solar energy is, it's important to know that switching to solar power can save you a lot of money on your electricity bills. On some occasions, going solar can result in a total elimination of your electric bills due to the free source of energy that is harnessed from sunlight and stored in batteries with no further costs once you have bought the panels.

For the average American household, energy costs can be pretty high, with an average $125 monthly bill. If your solar system is powerful enough to cover all of your electricity needs, you could save $1500 a year! And that's not even considering the long-term savings that come in once you've paid off the cost of installing and setting up those panels. Depending on your system and usage, you could start reaping the rewards of investing in solar power much sooner than you thought.

The Solar Tax Credit Extends Beyond Solar Panels

Installing solar cells to produce an excess of energy can be beneficial for many. Not only does it create the potential for you to make money by selling your extra power back to your utility company via net metering. Net metering rules vary from state to state and are subject to change depending on regulations. Consult with local solar companies who will provide more insight into how this works best for you. Fortunately, the solar tax credit covers more than just solar panels.

Maximize your federal tax savings by capitalizing on the ITC. The federal solar tax credit also covers the following:

  • Solar Panels are generally used to operate appliances and devices within the home.

  • Solar photovoltaic (PV) cells, including those used to power an attic fan (but not the fan itself)

  • Onsite contractor labor fees, including permissions and licenses, assessment expenses, and developer payments for setup or preliminary setup, are all covered under the assembly cost.

  • Balance-of-system equipment, including wiring, inverters, and mounting equipment

  • Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater (for systems installed after December 31, 2022). Even years after your initial solar system installation, you're still eligible to receive the advantages of Solar Tax Credit if you purchase and install storage batteries.

  • Sales taxes on all eligible expenses

You Can Combine it With Other Incentives

Use the federal Investment Tax Credit (ITC) and other rewards, like rebates from state governments, electric companies, and renewable energy certificates, to get the most out of your investment in solar energy. Also, some states offer extra tax credits that could greatly reduce the amount of taxes you have to pay this year on your solar power system.

For current information on incentives, including incentive-specific contact information, visit the Database of State Incentives for Renewable Energy (DSIRE).

Some other solar incentives you can combine with the federal tax credit may include:

State Tax Credits

Unlike many utility tax incentives, state government incentives don't need to be deducted from the federal tax credit. The amount of solar incentive differs significantly according to each state; however, California, Texas, Minnesota, and New York provide some of the most generous packages available. Undoubtedly, Hawaii is exceptional for its 35% solar tax credit with an absolute maximum reduction of up to $5,000!

Utility Company Rebates

Many local utility firms provide monetary incentives to encourage homeowners to adopt solar power systems. These may consist of discounts depending on the energy generated by your system and one-time subsidies for installation costs. When this applies, deduct the rebate you receive for installing solar from your total system costs before calculating your tax credit. For instance, if you install an $18,000 solar PV system in 2022 and get a one-time rebate of $1,000 from your utility company, then calculate your tax credit as follows:

($18,000 - $1,000) * 0.30 = $5,100

Performance-based incentives (PBIs) will give you credit per kilowatt-hour of renewable energy created from your setup - an excellent reward that can save you money!

Renewable Energy Certificates

When the utility or other buyer compensates you in cash or with incentives for your renewable energy certificates, it will be labeled as taxable income and inflate your gross income – but it won't affect the Federal Solar Tax Credit. Be aware that private letter rulings aren't assignable to other taxpayers.

Find states with SRECs markets.

State Rebates

Unlike utility rebates, state government rebates do not reduce your federal tax credit. For example, if you installed a solar PV system in 2022, with the installation costs totaling $18,000 and receiving a one-time rebate of $1,000 from the state government. Your federal tax credit would be calculated as follows:

$18,000 * 0.30 = $5,400

If you're looking to install a solar power system, take advantage of the numerous state-funded rebates available and lower your installation costs by up to 20%. Remember that these incentives are often only accessible for a limited time window, so act fast and research rebate availability before those funds dry up!

Check rebates available in your state.

How do I claim the federal solar tax credit?

To claim the federal solar tax credit, solar system owners should fill out IRS Form 5695 when filing their federal tax returns. If the solar panels were put up in 2022, the homeowner could claim the solar credit on their federal taxes for that year.

Find Out What Solar Can Do For You

Ready to cut your electricity bill and use green energy? Take our SmartSolar.org quiz for a quick way to find out if solar power is the right option for you. And, with the right setup, it's even possible to generate enough renewable energy that you can sell excess solar energy back to the grid.

Take the SmartSolar Homeowner Quiz to find out if solar panel installation is right for you.

Editorial Team
By Editorial Team
Our Editorial Team, made up of seasoned professionals, prioritizes accuracy and quality in every piece of content. With years of experience in journalism and publishing, we work diligently to deliver reliable and well-researched content to our readers.
Editorial Team
Editorial Team
Our Editorial Team, made up of seasoned professionals, prioritizes accuracy and quality in every piece of content. With years of experience in journalism and publishing, we work diligently to deliver reliable and well-researched content to our readers.
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