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Facts You Should Know About Federal Solar Tax Credits

Editorial Team
By
Updated Mar 07, 2024
Federal Solar Tax Credits

Homeowners can secure a remarkable return on investment with the federal solar tax credit. Investing in solar panels is sure to benefit you and your wallet!

The Investment Tax Credit (ITC) will now provide a tax credit that covers up to 30% of the cost of your solar power system. Incredibly, there is no limit on how much you can claim as a tax credit for installing solar panels!

In this article, we’ll take a closer look at solar incentives and the most important things you should know about tax credits for solar panels.

How Do You Qualify for the Solar Tax Credit?

To qualify for the solar panel tax credit, you must own your home (not lease or rent) and pay enough taxes to the federal government (have tax liability) so that the Residential Clean Energy Credit can offset your tax payment.

In order to get the Federal Solar Tax Credit, you must install a solar energy system that powers a home. This includes both solar water heaters and solar photovoltaic (PV) systems. 

You can also take advantage of the solar energy tax credit even if your solar system isn't on your primary residence. As long as you are the owner and inhabit it for at least part of the year, a portion of this credit may be claimed to reduce what you owe in taxes. 

However, no such benefit will apply if this investment property solely exists for rental purposes.

To qualify for the solar credit, energy-saving improvements need to be made to your US residence, which can include:

  • House
  • Houseboat
  • Mobile home
  • Cooperative apartment
  • Condominium
  • Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards

You do not qualify for the solar tax credit if you lease your solar panels.

What Does It Cover?

The solar tax credit covers anything that directly connects to your solar power system or is needed for the installation. This includes solar panels, mounting equipment, inverters, wires, and battery storage systems. 

The tax credit also covers other items related to installing panels on your roof, such as labor costs, assembly, installation, inspection, and sales tax.

It's important to remember that there is a significant difference between tax credits and refunds. To be eligible for a tax credit, you must owe taxes to the government. The amount of your credit will negate some or all of what you owe. 

You can receive the tax credit for the year your solar system is deemed operational by a city inspector. Find the best solar panel companies near you

Benefits of Solar Tax Credits

There are several essential things to know before investing in solar that will save you thousands:

1. Homeowners can reduce the cost of installation

The federal solar tax credit is a non-refundable credit worth 30% of the gross system cost of your solar project. That means that if the gross system cost is $20,000, your tax credit would be $6,000 ($20,000 x 30% = $6,000).

2. The Solar Federal Tax Credit rolls over

If a homeowner cannot take advantage of the total credit in one year, they may be able to carry over any unused amount into future tax years.

For example, if you qualify for a $6,000 maximum credit but only had a $4,000 taxable liability when your system was installed, you could potentially roll over up to $2,000 for use in subsequent years.

Keep in mind that this information does not constitute professional tax advice. Be sure to talk to a tax professional about claiming the solar investment tax credit this year.

3. You can use other solar incentives

Different states have different solar incentives, but California, Hawaii, Texas, Minnesota, and New York are known for having some of the most rewarding packages. Particularly remarkable is Hawaii's 35% tax credit with a max reduction of $5,000—a standout amongst its peers!

Here are some other solar incentives at your disposal:

State solar tax credits and incentives

While state and federal tax credits for installing solar PV are independent, claiming a state credit will raise the taxable income you report on your federal taxes since there is less state income tax to deduct. The end result of claiming a state tax credit is that the amount of the state tax credit is effectively taxed at the federal tax level.

For the most comprehensive and up-to-date information about current state incentive levels, check the Database of State Incentives for Renewable Energy (DSIRE).

Utility Incentives

Before assessing your federal tax credit, many utilities will first subtract any rebate from the total expense. This could reduce the value of your credit since it is based on the net amount after deductions.

For example, if you spend $20,000 for a solar power system and were refunded $1,000 by your electric company, rather than computing the tax credit over that original cost of $20,000, it would be computed against only $19K due to this deduction.

State Government Rebates

Use state-funded rebates to save even more money when you install a solar power system. Most states offer temporary incentives while funds last, so research available credits in your area before they expire. 

You could save up to 20% off the total cost with government aid alone.

Solar Renewable Energy Certificate

Solar Renewable Energy Credits (SRECs), also known as Solar Renewable Energy Certificates, are state-level incentives that reward solar panel owners. After registering your system with the relevant authorities, they will check your energy production and provide SRECs according to their regulations. You can sell these credits to a local utility company or another buyer for cash, which is considered income and subject to taxation.

Local Utility Rebates

Homeowners can take advantage of financial rewards from their local utilities by installing solar power systems. Rewards may include rebates based on energy production, one-time subsidies for installation costs, and performance-based incentives (PBIs), which credit you per kilowatt-hour generated by your system.

Subsidized Loans

If you're looking to fund your solar panel system, check out any subsidized loans offered by your state government or local utility. They could be the perfect solution for cutting costs when purchasing a system. 

Before you decide, it would also be a good idea to talk to an expert installer in your area. They are likely aware of all the local solar programs and can give you more information about what subsidies may apply to you. 

Tax Exemptions

You may be entitled to numerous tax exemptions after you set up your solar system. Even though these systems will increase the value of your property, some states and municipalities exempt them from assessment in their property taxes, meaning that it won't affect your bill when you install a solar system. 

Furthermore, some states make sure all purchases associated with the components of a solar power system are free from state sales tax.

How to Claim the Solar Tax Credit

To claim the tax credit, you must file IRS Form 5695 as part of your tax return. You'll calculate the credit on the form and then enter the result on your personal tax Form 1040.

If, on your taxes last year, the credits you received were more than what you owed in income tax, unfortunately, there is no way to get any money back from the IRS. However, you can simply carry this credit over to your next set of taxes for potential relief.

It’s important to understand that this is a tax credit, not a rebate or deduction. Tax credits offset the tax balance due to the government, so if you have no tax liability, there is nothing to offset, and you can’t take advantage of it.

Don't worry if you didn't claim the credit in a prior year. You can still do so by filing an amended return.

Solar Panels Save You Money 

Don't miss out on the tremendous savings you can get from solar tax credits and financial incentives when installing solar panels. Although there is still an upfront cost, taking advantage of these programs will help to cut that expense dramatically.

Let SmartSolar help you get started before you file your federal tax return for the year. They can help you determine how solar energy can help you based on your home’s electricity consumption.

Take the SmartSolar homeowner quiz to find out how much you can save with solar panel installation.

Editorial Team
By Editorial Team
Our Editorial Team, made up of seasoned professionals, prioritizes accuracy and quality in every piece of content. With years of experience in journalism and publishing, we work diligently to deliver reliable and well-researched content to our readers.
Editorial Team

Editorial Team

Our Editorial Team, made up of seasoned professionals, prioritizes accuracy and quality in every piece of content. With years of experience in journalism and publishing, we work diligently to deliver reliable and well-researched content to our readers.
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