Let's get this out of the way first: this tax credit is a great way to reduce the cost of your solar installation, AND it can also be used for related items such as batteries, generators, and related installations. So anytime you see a reference to Solar in the article below, know that this could be application to your installation. Full eligibility information is available below. Now let's get into the details....
Understanding Tax Credits: What You Need to Know
A tax credit is a powerful tool that directly reduces the amount of income tax you owe. It's like a dollar-for-dollar discount on your tax bill. For instance, if you claim a $1,000 federal tax credit, your federal income tax liability decreases by an equivalent $1,000. While it's often referred to as the Investment Tax Credit (ITC), it's distinct from the ITC offered to businesses that own solar systems.
Federal Solar Tax Credit Explained
The federal residential solar energy credit is a valuable tax credit that allows individuals to claim a percentage of the cost of a solar PV system they've paid for. It's essential to note that similar credits are available for other types of renewable energy, but we'll focus on solar energy in this discussion.
To be eligible for this credit, the installation of the solar PV system must be completed within the tax year. The credit percentage varies based on the installation year:
- For solar PV systems installed in 2020 and 2021, the credit is 26%.
- In August 2022, Congress extended the ITC, raising it to 30% for systems installed between 2022 and 2032. Systems installed on or before December 31, 2019, also qualified for a 30% tax credit.
- The credit drops to 26% for systems installed in 2033 and further reduces to 22% for those installed in 2034.
- Beyond 2034, the tax credit is set to expire unless renewed by Congress.
One notable aspect of this tax credit is that there is no maximum amount that can be claimed, making it even more appealing for those considering solar energy investments. So if you put in your installation in 2023 for $20,000 you would be eligible for the federal income tax credit of $6,000 ($20,000*.3=$6,000)
To determine if you can claim the federal solar tax credit, consider the following criteria:
- Installation Date: Your solar PV system must be installed between January 1, 2017, and December 31, 2034.
- Location: The solar PV system must be located at one of your U.S. residences.
- Ownership: You must own the solar PV system, which means you purchased it directly (either with cash or through financing). Leasing the system or buying electricity from a solar company disqualifies you from claiming the credit.
- New Installation: The credit applies only to the "original installation" of the solar equipment.
The federal solar tax credit covers several expenses related to your solar PV system, including:
- Solar PV panels or PV cells (excluding equipment like attic fans powered by solar cells)
- Labor costs for on-site preparation, assembly, or original installation, encompassing permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Energy storage devices with a capacity rating of 3 kilowatt-hours (kWh) or greater (for systems installed after December 31, 2022)
- Sales taxes on eligible expenses
Effect of Other Incentives
Various incentives can affect how the federal tax credit is calculated:
Utility Rebates: Subsidies provided by your utility for installing a solar PV system are generally excluded from income taxes due to federal law. This rebate is subtracted from your system costs before calculating the tax credit.
Renewable Energy Certificates: Payments for renewable energy certificates or environmental attributes of generated electricity may be considered taxable income, but they don't reduce the federal solar tax credit.
State Government Rebates: Rebates from state governments typically do not reduce your federal tax credit. They are usually considered separately.
State Tax Credits: State tax credits for solar PV installation usually do not affect federal tax credits directly. However, they may impact your federal taxes if they reduce your state income tax deduction due to the Tax Cuts and Jobs Act of 2017's limitations on state and local tax deductions.
Claiming the Federal Solar Tax Credit
To claim the federal solar tax credit, follow these steps:
- Seek professional tax advice and ensure your eligibility.
- Complete and attach IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR).
- Refer to IRS instructions for filling out the form, which are available online, and more detailed instructions here
Navigating tax credits can be complex, so consulting a tax professional is highly recommended to maximize your benefits while staying compliant with tax laws.
Note: Solar Altruism is not an accounting firm nor financial institution and all information in this article is to be used as educational information only. Do not take this information as tax advice and please contact your accountant if you have specific questions. You can find more information published by the federal government here