How Do Solar Tax Credits Work?

Taxes are one of life's inevitabilities. However, the government offers citizens different ways to save money on their tax bills by incentivizing specific actions. One of these actions is installing solar panels to provide clean energy for your home.

While the cost of installing solar panels has decreased in recent years, it's still a significant investment before you start benefiting from lower energy bills. However, you can reduce the costs of installations by claiming a solar tax credit.

This article will explain how federal solar tax credit incentives work and show how you can unlock these benefits to save money and the environment.

What Are Solar Tax Credits?

Solar tax credits are a type of incentive offered by the government to encourage homeowners and businesses to install solar energy systems. 

The credits can be used to offset the cost of installing and maintaining solar panels, making them a great option for those looking to reduce their carbon footprint and save money in the long run.

Solar tax credits can also be used as an investment, as they can increase the value of your home or business. The benefits are seemingly endless.

What You Need to Know About Solar Tax Credits

Understanding how solar tax credits work has rarely been more critical. Amidst news of climate change effects, inflation, and sky-high energy costs, many Americans are looking for clean solutions that won't break the bank.

Let's examine a few common questions about these solar incentives and show you how to claim solar tax credits.

What is a tax credit?

A tax credit is a dollar-to-dollar reduction on your taxes to incentivize specific behaviors. So, if you claim a federal tax credit, you can subtract that amount from the total income tax you owe. 

For example, if you are entitled to a $1000 tax credit, you get it back by paying $1000 less in federal income tax.

Is the solar tax credit refundable?

The Residential Clean Energy Credit is what is known as a non-refundable tax credit. That means that you can offset your income tax with these credits, but if the total amount is more than your tax liability, you won't get the excess back in a check. 

However, you can "rollover" your solar tax credit to the next year if it exceeds what you owe in tax for the year.

Are there any income limits on solar incentives?

The solar tax credit does not have any income limits. If you are a US taxpayer, you can claim the credit on eligible solar panels and related equipment investments you make in your home.

What costs does the solar tax credit actually cover?

The Residential Clean Energy Credit covers specific investments in solar panels and energy-saving equipment.

Here are the costs you can claim through your solar tax credit:

• Solar panels and other equipment that generate heat and energy for your home
• Labor costs for installing, assembling, and configuring your system
• Solar energy storage batteries or systems with a minimum storage capacity of 3-kilowatt hours (kWh)
• Equipment and materials required to install the system, such as mounting equipment and wires
• Sales tax on your equipment costs

What is not covered by the solar tax credit?

While the solar tax credit covers a lot of items, there are some notable exemptions. For example, solar incentives do not cover the following:

• Equipment purchased that is powered by solar fans
• Systems used to heat hot tubs or swimming pools
• Systems that you lease to other homeowners

Which homes qualify under the solar tax credit scheme?

If you want to get the solar tax credit, you must make improvements to your main or second home in the US. The different types of homes covered under the Residential Clean Energy Credit are:

• Houses
• Condos
• Cooperative apartments
• Manufactured homes that conform to the Federal Manufactured Home Construction and Safety Standards
• Mobile homes
• Houseboats

Am I eligible to claim the federal solar tax credit?

If you meet the following requirements, you may be eligible for the federal solar tax credit:

• You installed your solar panel system between January 1st, 2017, and December 31st, 2034
• Your own a solar panel system and you have installed it in your US residence
• You own part of an off-site community solar energy system, and the energy it generates is offset against but does not exceed your electricity bill
• The solar panel tax credit only covers the original installation. The system must be new, or you must use it for the first time.

Can you claim solar tax credits for properties you own but rent out?

You cannot claim the solar tax credit on installations for rental property you own unless you live in the home for part of the year and rent it out while you are away.

So, for example, if you live in the property for six months of the year, your credit will be reduced by half. Let's illustrate with a simple explanation:

You install solar panels at a total cost of $20,000. You are, therefore, eligible for a 30% solar tax credit under the Residential Clean Energy Credit Act. Therefore, your solar tax credit is $6000. 

However, if you live at your residence for six months per year and rent the property for the remaining six, your solar tax credit is $3000 or half.

How do I file for the solar tax credit?

Filing for the solar tax credit is relatively straightforward. When you file your tax returns, you must file IRS Form 5695. You can do this simply by determining your solar tax credit on Part I of the form and entering this number on your 1040.

As we mentioned earlier, the solar tax credit is non-refundable. So if your income tax bill is $5000 and your solar tax credit is $6000, you won't get the balance ($1000) back next year. However, you can carry over the balance to your next year's tax return and take the money off that.

If you installed the system last year but didn't file for the solar tax credit, don't worry. You can amend your return so you can claim your credit.

How long will the solar tax credit scheme last?

The 30% solar tax credit is available until 2032. During 2023, these incentives will drop to 26%, and in 2034, a 22% return will still be available. However, by 2025, the program will be over. 

Am I still eligible for the solar tax credit if my state offers a similar program?

Your state's solar incentives will not affect your federal solar tax credit. However, your state solar tax credit can be affected if you avail of the federal solar tax credit.

For example, New York offers solar incentives of 25% up to a total of $5000. Again, this is non-refundable, but you can carry it over into the next tax year. Applying for the federal solar tax credit won't affect your ability to take advantage of state solar incentives.

Each state uses different incentives to encourage residents to install green energy sources. Texas, California, and Minnesota are known for having strong solar incentives. However, with so many variations between each state, it's best to look at the Database of State Incentives for Renewables & Efficiency to get specific information. In addition, you can ask your installation company, like Smart Solar, for advice in your region.

Additionally, some state governments offer rebates for installing solar panels and related equipment. You can find details about these rebates at Energy.gov to access these time-limited incentives that can reduce your installation costs by as much as 10% to 20%.

Final Thoughts

The government has come up with solar tax credits and other ways to make homes more energy efficient to reward and encourage people to put in clean energy systems. The Residential Clean Energy Credit has been extended until 2034, which means there has never been a better time to put up solar panels.

Rising energy costs and rampant inflation, alongside ambitious carbon emission targets, are a concern for many citizens. Installing solar panels offers relief for the environment and your wallet—take the SmartSolar Homeowner Quiz to find out if solar panel installation is right for you.