Explaining the Federal Solar Tax Credit

2022 is the last year the Federal Solar Tax Credit will be at 26% for residential properties. Starting in 2023, the credit will drop to 22%, and by 2024 the credit will be eliminated. We’ve said it before, and we will keep saying it— the time is NOW for solar.

Solar can be an expensive investment and maybe you’ve been putting it off in hopes that prices will drop. While the price of solar has dropped considerably compared to ten years ago, the current rate of decline has hit somewhat of a plateau. That means the savings associated with the Federal Solar Tax Credit, also called the Solar Investment Tax Credit (ITC), are significant and something you do not want to miss out on.

The ITC was started in 2005 to encourage a national transition to renewable energy. In the last ten years, the average annual growth rate of residential solar in the United States has been 42%. By the end of 2021, the total solar capacity in the US reached 113.5 gigawatts, which equates to enough power for 21.8 million homes. The solar tax credit has been a huge success and has contributed to the growth in solar around the country. We hope the government will extend the credit past 2023, but there are no guarantees.

What is the Federal Solar Tax Credit and how does it work?

Before we get into the details, let us start by staying we are solar experts, not tax experts. For the most accurate solar tax credit information, please consult with your tax specialist. The ITC is a credit you can put towards your taxes when you purchase a solar system for your home. You must own the solar system; leasing a system won’t qualify you for the credit. You are also eligible for the credit if you purchase a newly built home with a solar system. When you install solar (or purchase a new home with solar), the government will give you a credit for 26% of the total cost of the system. This includes the cost of materials, shipping and all the labor associated with the installation. To claim the credit, you must fill out IRS Form 5695 and include it with your tax return. You can then deduct the credit amount from the total taxes you owe for that year. Keep in mind that the solar tax credit is not a refund; you must owe taxes to claim the credit. If you don’t have enough tax liability to claim the entire credit on one year, you can roll over any remaining credit back one year or into future years. If you purchase a battery to go along with your solar system, the battery is also eligible for the solar tax credit. In other words, you can get a credit of 26% on the total combined cost of the solar system and battery. The battery must be charged by solar energy at a minimum of 75% of the time to qualify.

In addition to the Federal Solar Tax Credit, your state might also have other clean energy incentives. Normally, state and federal tax credits do not affect each other, but it is best to consult with your tax expert to ensure you receive the maximum credit on your return.

Here’s an example to help clarify any confusion. Let’s say you install a solar system that costs a total of $20,000. In 2022, the solar tax credit on the project would be worth $5,200 (26% of $20,000). That means you can deduct $5,200 from the amount you owe on your taxes for that year. Say you only owe $3,000 is taxes. The amount you owe ($3,000) will be subtracted from the solar tax credit ($5,200), and the remaining $2,200 will be credited to your taxes the following year (or for the previous year).

The Federal Solar Tax Credit is just another reason why a switch to solar is one of the best choices you can make for your home, the planet and your wallet. Take advantage of the savings and invest in solar today. Don’t miss out!

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