Installing a solar photovoltaic system, or a solar panel system for your home’s energy, is a big step for homeowners who want to reduce their electric bills, increase their property value, and decrease their impact on the environment. While the size and cost of the solar power system varies based on the amount of energy a home consumes, solar is a large investment for homeowners. Fortunately, there are incentives and tax credits that can be claimed alongside flexible financing options to reduce the overall cost, making going solar an attainable goal for many.
The investment tax credit, or federal solar tax credit, allows homeowners to deduct 26% of the cost of installing the system from their federal taxes in 2021 and 2022. Have questions? Let’s break it down!
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. A tax credit can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system. The system must be placed in service during the tax year and generate electricity for a home located in the U.S.
What is the current federal solar tax credit?
A homeowner with a PV system installed before December 31, 2022 can claim a 26% tax credit. That rate decreases to 22% for systems installed in 2023. There’s no maximum that can be claimed.
What expenses are included?
- Contractor labor costs for onsite preparation, assembly, or original installation – including permit fees, inspection costs, and developer fees
- Energy storage devices, like Tesla Powerwall, that are charged exclusively by the associated solar panels, even if the storage device is placed in service in a subsequent tax year to when the solar energy system is installed (energy storage devices are still subject to the installation date requirements). This means you could install your panels in 2022, claim a 26% tax credit, pocket the savings for the rest of the year, then purchase your Tesla Powerwall in 2023 and receive a 22% tax credit on the purchase.
- Balance-of-system equipment, meaking the components of a solar panel system that are not the panels themselves – including equipment like wiring, switches, inverters, wiring, and mounting equipment
- Solar photovoltaic panels or cells used to power an attic fan (but not the fan itself)
- Sales taxes on eligible expenses.
Am I eligible to claim the federal solar tax credit?
- You installed a PV system between January 1, 2006 and December 31, 2023.
- The solar PV system is located at your primary or secondary residence in the U.S., or for an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption.
- You own the solar PV system (purchased with cash or financed, but not leased).
- The solar PV system is used for the first time.
Congratulations! You’re eligible to claim the federal solar tax credit.
What if I owe less than what the solar tax credit would pay?
This is a nonrefundable tax credit, meaning you will not get a tax refund for the amount of the tax credit that exceeds your tax liability. But! You can carry over any unused amount of tax credit to the next year.
How do I claim the solar tax credit?
Good old IRS Tax Form 5695! Energy Sage has a great 5-minute read on how to complete the form.
When do the tax credits go away?
The federal tax credit for installing a solar photovoltaic system drops to 22% in 2023, and as of January 1, 2024 goes away completely (unless it is extended by the federal government). Acting now, and installing a solar panel system in 2021 or 2022, secures the greatest savings for homeowners.
Are there other credits I can take advantage of?
Yes! There are state tax credits as well as net metering policies that will help homeowners save even more. To learn more about the latest benefits and possibilities of solar solutions, get in touch with an Icon Solar professional who can help guide you every step of the way.