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Disclaimer: Before reading this guidance, please remember that tax matters can be highly individualized and complex. EcoFlow does not provide any assurances or guarantees concerning potential tax credits that may be associated with our products. Any information we provide here in this guidance is solely for educational purposes and shall not be construed as legal advice. We recommend you rely on the expertise of tax professionals for accurate and personalized tax advice.
The Residential Clean Energy Credit — also known as the Federal Solar Tax Credit — offers a federal income tax credit of 30% on the costs of purchasing (or financing) and installing a solar power system for your home.
That includes solar panels, balance of system components like an inverter and a solar battery, installation costs — even the wiring!
The 30% tax credit helps put the benefits of renewable solar power within reach of many more American taxpayers…
But what if you want to switch to solar but don’t owe any taxes?
Read on to find out.
What Is The Solar Tax Credit?
The Federal Solar Tax Credit — now officially the Residential Clean Energy Credit — offers a 30% reduction in income tax liability to eligible homeowners and communities who purchase a home solar panel system in the United States.
If you qualify, you’ll get 30% of the total cost of your solar system back, including installation.
There’s no limit on how much your solar panels, balance of system, and installation costs can reduce how much income tax you owe.
You can also apply for the credit more than once if you purchase additional eligible equipment.
The Residential Clean Energy Credit is an enormous benefit for homeowners who want to switch to solar for their primary or secondary residence.
Renters and other taxpayers can also benefit through community solar projects.
Transitioning to solar power was already a solid long-term investment.
You’ll achieve solar payback much quicker by cutting 30% of your PV system and installation costs from the federal income taxes you owe.
You’ll actually start earning money once you save more money on electricity bills than you spent on your solar power system.
Money saved is money earned.
What Is a Tax Credit?
The Internal Revenue Service offers taxpayers various ways of reducing their income tax liabilities.
A tax credit is one of them, and it works differently from a tax deduction or a tax rebate.
Here’s a summary of how each of these tax liability reductions works.
- A Tax Credit is a dollar-for-dollar reduction in the amount of income tax you owe. If you owe $50,000 in income tax and receive a tax credit of $10,000, your income tax liability is reduced to $40,000
- A Tax Deduction reduces the amount of your income subject to tax. Usually, tax deductions are taken for eligible expenses. For individuals, that may include medical or childcare expenses. For business owners, many items may be eligible for a tax deduction. The difference between a credit and a deduction is that a deduction doesn’t necessarily reduce your income tax by a dollar-for-dollar amount. If you are taxed on $150,000 of income and take $30,000 in deductions, your taxable income is reduced to $120,000. How much tax you actually owe depends on numerous other factors — like your marital status and tax bracket.
- Tax Rebates are a relative rarity in the United States. In certain circumstances, the federal or state governments will send you a check to refund taxes you’ve already paid. One example is the Recovery Rebate Credit of 2008.
What is a Tax Liability?
Federal, state, and local governments are funded primarily by taxing individuals, businesses, and property.
As an individual, your tax liability is quite simply the amount you owe in taxes.
Most Americans or permanent residents who earn money from working or owning a small business are liable for some form of income tax.
How Does the Federal Solar Tax Credit Work?
If you’re eligible, the Residential Clean Energy Credit can reduce the amount of your federal income tax liability you owe by up to 30% of what you spend on purchasing and installing a renewable energy system.
A solar power system is the most viable option for most homeowners and communities, but it’s not the only one.
According to the IRS, the following new renewable energy systems are eligible for the credit:
- Solar electric panels and balance of system
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage technology (beginning in 2023)
Solar panels are by far the most straightforward systems for homeowners and communities to install — especially on existing homes.
If you haven’t applied for previous solar tax credits like the ITC and purchased a residential solar power system in 2006 or later, you may still be eligible to claim some or all of the Residential Clean Energy Credit.
For the purposes of this article, we’ll be focusing on new solar electricity purchases and installations.
Filing for the credit is actually quite simple, whether you do your taxes by hand, with TurboTax, or use an accountant or other tax professional.
Regardless of your tax preparation method, you’ll need to file IRS Form 5695.
What Does Form 5695 Do?
By itemizing expenses eligible for the Residential Clean Energy Credit and Energy Efficient Home Improvement Credit on Form 5695, you can reduce your income tax liability.
New residential solar panel systems and some battery storage solutions (minimum 3kWh of storage capacity) should be eligible for a 30% tax credit once installation is complete.
The Residential Clean Energy Credit is non-refundable. If your tax credit exceeds the amount of income tax, you won’t receive a check for the difference. However, you can roll over leftover credit to future tax years.
Eligibility for the Residential Clean Energy Credit
For a residential solar power system purchased between January 1, 2022, and December 31st, 2032, to be eligible for the Residential Clean Energy Credit, you must meet the following requirements:
- Installation must take place between January 1, 2022 and December 31st, 2032. It’s essential to note that your system must be turned on and operational during the tax year you claim the credit. You won’t be eligible to claim if you purchase solar panels and leave them in your garage.
- The solar PV system must be installed at your primary or secondary residence in the United States. It’s essential to note that your “primary residence” doesn’t have to be a house or apartment. You may still be eligible if you live on a boat or in an RV.
- The system must be new or installed and used for the first time. Used equipment is not eligible.
- You must own the system. Ownership includes financing arrangements with manufacturers where you are contractually obligated to pay for the system in full over time. The credit doesn’t apply to equipment that’s rented, leased, or subject to other solar purchasing contracts.
How Does the Solar Tax Credit Work if I Don’t Owe Taxes?
If you don’t owe any federal income taxes in the year you install your solar power system, you won’t be eligible for the Residential Clean Energy Credit during that tax year.
Additionally, you won’t be able to receive a refund on income taxes paid in previous tax years.
However, you can claim the credit and roll it over to future tax years. For example, if you purchase and install an eligible solar power system in 2024 but don’t owe any tax, you may be able to claim the credit against income tax owed in 2025 or subsequent years.
Taking this approach rather than applying the credit in your installation’s tax year does complicate matters. Contacting a tax professional for advice before purchasing a residential solar power system and expecting to claim the Federal Solar Tax credit in future tax years is strongly advisable.
There are many incentives besides tax credits for switching to solar energy for electricity generation.
But, as noted above, the Residential Clean Energy Credit is non-refundable. You won’t receive any savings or get money back in your installation year if you don’t owe any federal income taxes in that tax year.
If you’ve taken a year off or don’t owe income taxes for any other reason and plan on earning taxable income in the following year(s), the door may not be closed.
Again, consult an accountant or tax professional for advice on your best course of action.
Can the Solar Tax Credit Be Combined With Other Solar Incentives?
Yes, the Residential Clean Energy Credit can be combined with other federal, state, local government, or utility company incentives for producing solar energy.
There’s also no limit to how much you can claim, and you can claim the credit more than once.
Thoroughly research what other solar energy programs the government or your utility provider offers to ensure you take full advantage of all the incentives you’re eligible for.
Frequently Asked Questions
The Residential Clean Energy Credit is non-refundable. If you claim 30% of your solar power system as a credit and it exceeds what you owe in federal income taxes for that year, you won’t receive a check for the difference. However, you can roll over any leftover credit to income tax liability in subsequent tax years.
The Residential Clean Energy Credit makes it possible for many American taxpayers to save 30% of a solar power system’s purchase and installation costs on their federal income taxes.
Long story short, if you don’t pay federal income tax, the credit isn’t available to you.
However, if you expect to have taxable earnings in the future, the door to benefit from the Federal Solar Tax Credit may not be slammed shut.
It’s best to consult a tax professional before purchasing a residential solar power system if you’re counting on receiving the credit but don’t owe federal income taxes in your installation year.
Interested in switching to renewable, clean energy for your household electricity generation needs?