How the Solar Investment Tax Credit Works: Eligibility and Application

As homeowners turn to renewable energy sources, it is important to understand how to maximize financial incentives. One of the biggest incentives for installing solar energy on your home is the federal solar tax credit, formally known as the Investment Tax Credit (ITC). Learn the details of how the federal solar tax credit works, eligibility criteria for solar energy systems, and how to claim and combine this credit with other incentives; reducing the initial investment.

What is a Tax Credit?

Understanding what a tax credit is, is the first part of understanding how the federal solar tax credit works. A tax credit is a financial incentive provided by governments to encourage specific investments. Unlike tax deductions that reduce taxable income, tax credits directly reduce the amount of tax owed. They can be offered for various purposes, such as promoting renewable energy adoption, supporting education expenses, or incentivizing research and development.  

 

Tax credits can be refundable or non-refundable: refundable credits can result in a refund if they exceed tax liability, while non-refundable credits can only reduce tax liability to zero. Governments use tax credits to achieve policy goals, stimulate economic activities, and provide targeted support to certain industries or activities.

How Does the Federal Solar Tax Credit Work?

The federal solar tax credit, or ITC, allows homeowners to deduct a portion of the cost of installing a solar energy system from their federal taxes. This is how the federal solar tax credit works to promote the adoption of renewable energy.  

 

The ITC offers a percentage of the total installation cost of the solar energy system as a tax credit. For solar panel systems installed from 2022 to 2032, the tax credit is 30%. This percentage decreases in subsequent years unless Congress renews it. The credit is claimed once for the year the solar installation is completed, although unused credit can be carried over to future years if your tax liability is lower than the credit. 

What is Covered by the Federal Solar Tax Credit?

To qualify for the federal solar tax credit, the solar energy system must meet specific criteria, which can include: 

 

• Solar Panels: Includes photovoltaic (PV) panels that generate electricity.

• Equipment: Additional parts of the rooftop solar panel system are covered, like wiring and inverters.

• Solar Water Heaters: Systems that heat water using solar energy, as long as at least half of the energy used to heat the water comes from the sun.

• Solar Batteries: Energy storage devices which store electricity generated by solar panels for later use or during emergencies.

• Labor: The labor to install the solar panel system is covered. This includes permitting and inspection costs.

• Sales Tax: For states that have sales tax, sales tax on your solar system is also covered by the Federal Solar Tax Credit.

 

On the other hand, there are some aspects that do not qualify for credit:  

 

• Roof Repairs or Replacements: While the installation of solar panels on a new roof may qualify, the cost of repairing or replacing the existing residential roof does not.

• Energy-Efficient Windows: Though efficient windows are beneficial for reducing heating and cooling costs and improving overall home energy efficiency, these do not qualify for the Investment Tax Credit (ITC).

• Stand-Alone Batteries: Only batteries installed as part of a solar energy system are eligible for the federal investment tax credit.

Solar Energy System Eligibility

To qualify for this federal tax credit, homeowners must meet several criteria. First, they must own their solar panel systems; Power Purchase Agreements (PPAs) and leases are not eligible. Additionally, the solar panels must be installed and operational in the tax year for which the credit is claimed. The installation location must be a residential property within the United States of America. Furthermore, the solar panel system must be new and not previously used or refurbished. These requirements ensure that taxpayers can benefit from the Federal Investment Solar Tax Credit when investing in new solar energy systems for their homes.

How to Claim Your Federal Investment Solar Tax Credit

Claiming the federal solar tax credit involves a few straightforward steps.

 

1. Complete IRS Form 5695, which calculates your tax credit based on the cost of your solar energy system. Be sure to include all eligible expenses, such as solar equipment and installation costs.
2. Once you have completed Form 5695, the calculated credit amount should be transferred to your main tax return form, IRS Form 1040.
3. Specifically, you will enter the credit amount on Schedule 3 (Additional Credits and Payments), and then the total from Schedule 3 is included on Form 1040. This process ensures your tax credit is accurately applied to your overall tax liability, reducing the amount you owe or increasing your refund. If your tax credit exceeds your tax liability for the year, the unused portion can be carried forward to future tax years.

 

To claim the federal solar tax credit on your taxes in 2024 you will need to first check your solar energy system meets the eligibility criteria (listed above), including installation dates and specifications outlined by the IRS. Gather all necessary documentation, such as receipts, contracts, and manufacturer certifications. Blue Raven Solar customers can email support@blueravensolar.com to obtain their Home Improvement Contract (HIC). Complete IRS Form 5695 to calculate your residential energy credits and include the total credit amount on your Form 1040. Double-check all information to be accurate and that you’ve included any carryforward credits from previous years if applicable. Consult a tax professional for specific advice tailored to your situation to ensure compliance and maximize your tax benefits. 

 

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.

Combining the Federal Tax Credit and Other Incentives

The federal solar tax credit can be combined with other state or local incentives to maximize savings. For a state-by-state guide on additional incentives available, check out this resource. Local utility companies frequently offer rebates for solar installations. Check with your current utility company to discover your potential solar savings. In addition, some municipalities provide grants or incentives specifically for solar energy projects and installations. It is important to investigate how the federal solar tax credit can work to maximize your financial savings.

How Blue Raven Solar Can Help You Save

Understanding the federal solar tax credit helps homeowners make informed decisions that benefit the environment and offer significant financial savings. Ensure your solar panels, water heaters, or batteries meet the eligibility criteria to maximize your savings. By partnering with Blue Raven Solar, you can have access to expert guidance on navigating the federal investment tax credit amongst other incentives, maximizing your savings potential, and seamlessly integrating sustainable energy solutions into your home. Partnership with us simplifies the solar installation process and guarantees long-term benefits for both your wallet and the planet.

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