5 min
Federal Solar Tax Credit Guide
Key Takeaways
- If you purchase (not lease) new solar equipment for electricity generation, water heating, or energy storage, you can often use the Residential Clean Energy Credit to reduce your tax liability
- To qualify, these energy-saving enhancements must be made to your primary US residence, which can include various types of homes like houses, mobile homes, cooperative apartments, condos, manufactured homes, or houseboats.
- The credit may also apply to a vacation home, but only for the portion of the tax year you use it as a residence.
- To claim the Federal Solar Tax Credit, you'll need to fill out IRS Form 5695 and include the result on IRS Form 1040.
- The residential solar energy credit is valued at 30% of the installed system costs until 2032, decreasing to 26% in 2033, and further decreasing to 22% in 2034 before expiring.
What Is a Tax Credit?
Let's begin with understanding what a tax credit is. A tax credit is a dollar-for-dollar reduction in your tax liability. This isn't just a deduction from your taxable income, but a credit subtracted from your tax bill directly. So, if you owe $8,000 in taxes and receive a $5,000 tax credit, you end up owing just $3,000.
What Is the Federal Solar Tax Credit?
The Federal Solar Tax Credit, also known as the Investment Tax Credit (ITC), is a U.S. government initiative. It's designed to financially support homeowners and businesses that want to install solar energy systems.
How Does the Federal Solar Tax Credit Work?
The Solar Tax Credit allows you to deduct a percentage of the cost of installing a solar energy system from your federal taxes. For instance, if your solar system cost $20,000 and the tax credit rate is 30%, you could reduce your federal tax liability by $6,000.
The percentage you can deduct has changed over time. Right now it is 30%, then reduced to 26% for 2033 and 22% in 2034.
Federal Solar Tax Credit Eligibility
Who is eligible for the solar tax credit? If you own your home or commercial property and purchase your solar energy system outright (either with cash or a loan), you're eligible. Leased systems or ones under a power purchase agreement (PPA) don't qualify because you don't own the system.
Learn more about solar financing here: What is the best way to finance solar?
What Does the Federal Solar Tax Credit Cover?
The Federal Solar Tax Credit covers various costs related to installing a solar energy system. This includes the solar equipment itself, shipping costs, engineer and installer professional service fees, electrician fees, and even permit fees.
| What's Covered | Explanation |
|---|---|
| Solar Equipment | Includes solar panels, inverter, mounting equipment. |
| Installation Costs | Includes labor costs for on-site preparation, assembly, and installation. |
| Professional Service Fees | Includes costs for developers, electricians, and installers. |
| Permitting Service Fees | Fees related to applications and inspections. |
| Freight Shipping Costs | Shipping costs for transporting equipment. |
How to Claim Solar Tax Credit?
To claim the Federal Solar Tax Credit, you'll need to fill out IRS Form 5695 and include the result on IRS Form 1040.
- Complete Form 5695 to calculate your credit amount.
- Input this data on your 1040 individual tax return.
- Add Form 5695 to your tax return when filing.
Remember, if your tax credit exceeds your tax liability, the remainder can be carried forward to the next tax year.
How Do Other Incentives Affect the Federal Solar Tax Credit?
State and local solar incentives, solar renewable energy certificates (SRECs), and utility rebates can help reduce the cost of your solar energy system further. However, they don't impact your Federal Solar Tax Credit directly. The federal tax credit is calculated based on the net system cost, i.e., after other incentives have been deducted from the original system cost.
The Federal Solar Tax Credit is a valuable incentive for homeowners and businesses to transition into renewable energy. It's a fantastic opportunity to contribute to a more sustainable future while also saving money on your taxes.
Please consult with a tax professional to ensure you meet all eligibility requirements and to understand the full implications for your individual tax situation.
Am I Eligible to Claim the Federal Solar Tax Credit?
Eligibility for the Federal Solar Tax Credit is primarily determined by two key factors: ownership and tax liability.
- Ownership: You need to own the solar panel system. If you lease your system or have a Power Purchase Agreement (PPA), you are not eligible, as the system is not owned by you
- Tax Liability: You need to have a federal tax liability to take advantage of the credit. Remember, it’s a tax credit, not a rebate, so if you owe no taxes, there is no credit.
Keep in mind that the system must be installed and operational by December 31 of the tax year for which you’re claiming the credit. Additionally, the tax credit is nonrefundable, meaning you won't receive a refund if the credit is larger than your tax liability. However, you can carry over the unused portion of your credit to the following year.
Federal Tax Credit Summary
The Federal Solar Tax Credit is a valuable incentive (a credit valued at 30% of the installed system) to help make the switch to renewable energy more affordable. The credit plays a key role in helping to reduce our carbon footprint while also saving money. We can help you understand the local, state and federal incentives you qualify for. Learn more below.