How the Solar Investment Tax Credit Works
With the recent passage of the Inflation Reduction Act, the Federal Tax Credit for Solar Photovoltaics, also known as the Investment Tax Credit or ITC, was expanded in both amount and timeline. This expanded tax credit gives homeowners alternatives to rising electricity costs and new ways to fight inflation.
The solar industry is growing at an average annual rate of 24% over the last 10 years and for homeowners looking to join the movement, this solar tax credit makes going solar more affordable. Below we’ll break down what this solar tax credit entails, who qualifies, and how eligible homeowners can claim the tax credit.
What is the Federal Solar Investment Tax Credit?
The Federal Tax Credit for Solar Photovoltaics (ITC) is a non-refundable, dollar-for-dollar reduction in a homeowner’s federal income. It is provided to offset the cost of residential solar by 30% to make it more affordable and accessible and to encourage wider adoption of renewable energy. For example, if you owe $5,000 in federal taxes, claiming a $4,000 solar tax credit would reduce your federal taxes by $4,000, and you would owe a remaining $1,000 in federal taxes. The ITC is not a tax deduction or exemption.
First enacted in its current form in 2005, the ITC is a tax credit equal to a percentage of incurred eligible costs from going solar. The credit can be claimed on federal income taxes in the year the installation of the system is complete. Since its inception, the ITC.
Here’s a timeline of the ITC over the past few decades:
2005: The Energy Policy Act of 2015, authorized under sections 25D and 48 of the US tax code, first created the 30% tax credit for residential and commercial solar energy projects. It was set to expire in 2006.
2006: The ITC was extended for one additional year by the Tax Relief and Health Care Act of 2006.
2008: The Emergency Economic Stabilization Act of 2008 extended the ITC for eight years and eliminated the previous $2,000 cap for residential solar panel systems.
2016–2019: The ITC was extended again for another five years in early 2016 with the Consolidated Appropriations Act of 2016. This extension introduced a step-down approach to the benefit for the eventual sunset of the credit, but for these first few years, the benefit stayed at 30%.
2020–2021: Based on the phase-down percentage introduced in the Consolidated Appropriations Act of 2016, the ITC dropped to 26% in 2020 and was scheduled to drop to 22% in 2021 before Congress extended the ITC at 26% for solar systems installed 2021 with the Better Energy Storage Technology (BEST) Act of 2020.
2022–2032: The ITC dropped to 26% in 2022 until President Biden signed the Inflation Reduction Act of 2022, which bumped the ITC back to 30% and extended it to solar systems installed between 2022 and 2032, after which the ITC will be phased out.
2033: Owners of new residential solar systems installed in 2033 will be entitled to a 26% ITC benefit.
2034: Owners of new residential solar installed in 2034 will be entitled to a 22% ITC benefit.
2035: Unless extended by Congress, there will be no ITC benefit for residential solar installed after 2034.
How Much Can You Save with the ITC?
The ITC allows you to claim 30% of the total cost of your solar system with no maximum on the amount you can claim. For the average system, the ITC represents about $7,500 in savings—a major reduction in the overall cost.
However, the ITC benefit changes over time. Owners of solar systems installed between 2022 and 2032 are entitled to a 30% tax credit, with a 26% ITC on solar systems installed in 2033 and 22% ITC in 2034. Unless it is renewed by Congress, the ITC will expire in 2035.
If the ITC exceeds the amount you owe in federal income taxes that year, the unused portion of the ITC is not lost but rolls over to subsequent tax years. For example, if your ITC was worth $7,500 but you only owed $7,000 in federal income tax, you could apply the remaining $500 ITC toward your federal income tax in the following year.
Who Qualifies for Solar ITC?
Any taxpayer who purchases a solar panel system for their primary or secondary residence is eligible to claim the federal solar investment tax credit (the ITC is also available for commercial properties). However, it’s important to note you must own the solar system to take advantage of the ITC. Those who are leasing their solar system or have a power purchase agreement (PPA) in place are not eligible to claim the ITC.
Additional qualifications include:
- Your solar system was installed between January 1, 2017, and December 31, 2034.
- The system is located in the United States at your primary or secondary residence.
- You own the system by purchasing it through cash or financing options.
- Your system is new or being used for the first time (the credit only applies to the “original installation” of the solar equipment).
What Expenses are Included with the Solar Tax Credit?
The ITC applies to various expenses associated with solar system installation, from the panels themselves to labor costs of assembly and installation.
Eligible expenses include:
- Solar photovoltaic (PV) panels and cells
- System equipment like mounting, wiring, and inverters
- Permitting and inspection
- Energy storage devices (e.g., batteries)
- Sales tax on eligible expenses
Batteries can be claimed for tax credit even if they are purchased or installed a year or more after installing the solar system.
How Do Other Incentives Affect the Solar Tax Credit?
In addition to the solar tax credit, several states offer solar incentives. A few common incentives include tax credits, subsidized loans, rebates, and renewable energy certificates. However, each state’s solar incentives vary. Here’s a look at a few in particular.
State Tax Credits
Most state tax credits work the same way as the federal ITC—dollar-for-dollar reduction of the taxes you may owe. Eligibility and benefit amounts vary widely by state and generally don’t impact your federal solar incentives.
State Government Rebates
There are a number of states and utility companies offering limited-time rebates for installing a solar system. These programs often offer an upfront payment of 10% to 20% of the cost of installing a new photovoltaic system. However, these rebates are typically time-bound, making it critical to do your research and get your paperwork submitted before the state program ends.
Solar Renewable Energy Certificates
In some states, the amount of energy your solar system generates can be converted to renewable energy certificate (SREC) that can be offered to regulators and environmentally conscious organizations to meet their commitment to clean energy and environmental stewardship. Generally, for every 1,000-kilowatt hour of electricity your solar system generates, you’ll earn one SREC. The monetary value of SRECs changes over time and depends on supply and demand and the existence of a SREC market in your area.
Browse the Database of State Incentives for Renewables & Efficiency to learn more about the solar incentives that may be available to you in your state. Go HERE for more information about solar products, technologies, and installation.
How do I Claim the Solar Investment Tax Credit?
Claiming your ITC is done by filing IRS Form 5695 along with your federal tax return. As with most tax filings, you should consult a tax professional for assistance in claiming the ITC.
Here are step-by-step instructions on how to claim 30% on federal income taxes:
- File IRS Form 5695.
- Calculate the credit on Part I of the form.
- Enter the result on your 1040.
Remember, even if your ITC exceeds how much you owe in taxes, the unused portion of the ITC will carry over from one year to the next.
Additional ITC FAQs
Making the decision to switch to solar requires you to weigh a variety of variables, and you may have additional questions about how the ITC applies to your situation.
Here are a few more answers to commonly asked questions. If you have additional questions, reach out to our team of solar experts.
Is there a dollar or lifetime limit on the federal solar tax credit?
No. There’s no dollar or lifetime limit on the tax credit. As long as a new solar panel system is being installed, the tax credit offers a 30% credit on the total installation cost in a given year.
If the tax credit exceeds my tax liability, will I get a refund?
The ITC is a nonrefundable tax credit. This means you will not get a refund for the amount of the tax credit if it exceeds your tax liability. If you have overpaid your taxes during the year (which can often occur when employers deduct taxes from your paycheck), you may receive a refund. However, such a refund is still limited by your total tax liability.
If the credit exceeds your liability for the year in which you claim it, you can roll over the remaining amount of the credit to following years.
Is the solar tax credit a one-time credit?
Yes, the ITC is currently a one-time credit. You can only claim the credit once.
How Blue Raven Solar Can Help
The ITC allows homeowners to save 30% of the cost of their solar system. It includes expenses from installation, solar equipment and materials, batteries, corresponding sales tax and other things. And, with the ITC’s recent expansion, homeowners can take advantage of this cost-saving measure for years to come.
At Blue Raven Solar, we provide a world-class customer experience and hassle-free solar installation process from start to finish so you can reduce energy costs and invest in renewable resources. Learn more about how much you can save by requesting a free quote today.
Blue Raven Solar, LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for information purposes only. It is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Consult a tax and legal professional for more information.
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