The push toward renewable energy sources is part of a global movement to go green and save the planet from devastating climate change. Businesses and homeowners across the US are reaping the rewards of their efforts to switch to solar, thanks to a wide range of solar power incentives and tax credits.
The US government has rolled out a series of tax credits for people who install solar power systems. In this article, we’ll discuss what tax credits are, who is eligible to claim them, and how to go about doing so. We’ll also look at state and local incentives for solar power in addition to the Federal Solar Tax Credit.
What Is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. For example, if you owe $1,000 in taxes and have a $500 tax credit, your bill will be reduced to $500. Tax credits are different from deductions, which reduce the amount of income that is taxed. Because they’re a direct reduction in taxes, these credits are more favorable than deductions.
The three types of credits include refundable, nonrefundable, and partially refundable. Nonrefundable credits can reduce your burden to $0 but will not put any money in your pocket as a refund. With a refundable credit, even if your liability is $0, you will still receive the total amount of the credit. Partially refundable credits are somewhere in-between — some of it is refundable even if it’s more than is owed.
What is the Federal Solar Tax Credit?
The federal Investment Tax Credit (ITC) is a solar tax credit that allows you to deduct 30 percent of the cost of installing solar from your owed federal taxes. The ITC applies to residential and commercial installations, and there is no limit on its amount.
The government raised the credit amount in August 2022, when Congress passed the Inflation Reduction Act (IRA), which extended the ITC and increased it to 30% for any solar installations completed between 2022 and 2032.
The ITC tax credit savings won’t last forever, though. Included in the ITC is a gradual lowering that steps down the credit to 26 percent in 2033 and 22 percent in 2034. This tax credit will expire in 2035 if Congress does not extend it.
The ITC tax credit can also apply to the cost of installing a solar photovoltaic (PV) rooftop system within that tax year, including the following:
- The equipment itself, i.e., solar PV cells or panels used to generate electricity
- Labor costs, including contractor costs to prepare the site, assemble equipment, and install the system; inspection costs, permitting fees, and fees from developers
- Other equipment to balance the system, including inverters, wiring, and additional mounting equipment
- Sales tax on the above expenses
Are You Eligible to Claim the Federal Solar Tax Credit?
You can claim the ITC if you have installed a solar power system in your home or business in the United States. The tax credit earned will depend on when you installed the system.
Homeowners or business owners with a solar-powered system installed in 2021 should have claimed a 26% tax credit on their 2021 tax return. Those installing systems in 2022 up to 2032 can claim a 30% tax credit on their return for the year they installed it.
If you aren’t sure whether your system is eligible for the federal solar credit, contact your installing company, the equipment manufacturer, or your state’s energy incentives program. You should always consult your tax professional to determine your eligibility for tax credits given your individual situation.
How to Claim the Federal Solar Tax Credit
You can claim the solar tax credit on your federal income tax return. You’ll need to complete IRS Form 5695 to calculate residential energy credits and attach the form to your return. The form includes instructions on calculating the credit, which factors in the system’s cost and the rooftop panels’ electricity generation capacity.
To complete this form, make sure you have calculated the qualified solar electric property costs, which is the total amount of your solar energy system post-rebates. Add that figure to line 1 of Form 5695. Below, in lines 2-5, you’ll add any costs of other energy improvements you’ve made. That gives you the total amount (on line 6) that will factor into calculating your tax credit. Then, multiply the line 6a figure by 30% for PV systems installed from 2022-2032, and add it to line 6b.
To calculate if you have a high enough tax liability to earn the 30% credit in one year, be sure you’ve completed sections 1-18 on your 1040 Form. Then, using page 4 of Form 5695, write the number from line 18 of Form 1040 and subtract any additional tax credits below that to calculate your actual liability.
Take that final figure and enter it into line 14 of Form 5695. Review lines 13 and 14 and write the smaller value on line 15.
Is your tax liability less than your tax credit? Put the difference on line 16. That figure will be how much of your credit you can claim next year. You can claim the entire amount in your first year if there’s no difference.
Then, add the value found on line 15 from Form 5695 to your Schedule 3 and Form 1040. For Schedule 3, add it to line 5, and be sure to attach your Form 5695. For Form 1040, add the number from line 8 of your Schedule 3 onto line 20 of your Form 1040. That’s it!
You can claim the ITC even if you do not owe any taxes. In this case, you’ll receive the credit refund as a rebate check from the IRS.
How Much Does the ITC Save?
According to data from EnergySage, the average cost of installing a system of solar panels is around $20,000. Considering the 30% ITC, it will reduce your tax burden by about $6000, lowering the gross cost of your solar-powered system to around $14,000.
Residents stand to save more with more expensive systems, but choosing a moderately priced system would result in a smaller gross total overall.
State Solar Power Incentives
In addition to the ITC, many states offer their own incentives for solar power. These state solar power incentives include credits, rebates, and grants. They are often available for both residential and commercial solar installations.
New York Solar Power Incentives
The state of New York offers several solar power incentives for homeowners and businesses. The NY-Sun Initiative is a statewide umbrella program offering solar PV systems incentives.
The Megawatt Block Incentive is an ambitious incentive that provides residents and commercial businesses a dollars-per-watt rebate on their solar panel systems based on the size of the system and location. Incentive values may range from twenty cents per watt to fifty cents per watt, depending on the area and provider.
Another effort is New York’s net metering policy which ensures solar owners are paid fairly for any excess energy they send to the grid. These credits can be stored for use during months when solar energy systems may produce less power.
There’s also a state solar credit that reduces state tax payments by 25% or $5,000, whichever is lower. This credit applies even to those who lease their solar, and participants can roll over any extra credits beyond an individual’s state tax liability to the following year.
California Solar Power Incentives
For homeowners in California, the Golden State offers rebate programs to many areas, paying solar buyers between $300 to $.095/watt of installed capacity. The Rancho Mirage Energy Authority offers a one-time $500 rebate, while the Sacramento Municipal Utility District (SMUD) offers a $150 stipend per installation of residential solar PV systems.
Net metering is also an available incentive in California. Homeowners receive credits directly on their energy bill for any extra energy they send to the grid, with a limit of 5% of aggregate customer peak demand. Net energy metering programs in California include:
- Pacific Gas & Electric (PGE)
- Los Angeles Department of Water and Power
- Southern California Edison
- San Diego Gas and Electric
Texas Solar Power Incentives
Although Texas does not have a state-level solar tax credit, many other financial incentives are available, including rebates and favorable policies for homeowners and businesses who want to go green.
Texas also has a renewable energy exemption that safeguards homeowners from facing higher property tax rates due to the added value solar panels provide. Another special protection in Texas is the solar rights law that prevents homeowners associations (HOAs) from banning residents with solar-powered systems on their residences.
If Texas homeowners want a compromise that allows them to utilize solar without aggravating their HOA, they can invest in solar generators, like the DELTA Pro. It offers enough energy and expandable capacity to run an entire home.
Additionally, many local governments in Texas offer their solar rebates, and many utility companies continue to offer net metering.
In Austin, rebates are available for up to $2,500, in addition to $0.097 paid for each kWh the panels produce. CPS Energy customers receive $2,500 for installing rooftop solar and an additional $500 for using locally-sourced panels.
Local Solar Power Incentives
On top of state and federal solar incentives, many local municipal governments offer programs encouraging solar power adoption.
Let’s look at the solar power incentive programs for Boston, Los Angeles, and Washington, D.C.
Boston residents enjoy a 15% state personal tax credit for up to $1,000 and state sales and property exemptions for solar.
They are also eligible to earn Solar Renewable Energy Certificates, which hold a value of $300 each. Homeowners receive credits for each megawatt-hour of electricity they sell back to utilities, which helps utility companies meet renewable energy standards.
Those who call Los Angeles home enjoy a state property tax exemption for 100% of the cost of the system. Los Angeles residents also receive a city utility rebate from the Los Angeles Department of Water and Power at forty cents per watt capacity, totaling up to 75% of the project cost.
Washington, D.C. saw Boston’s $300 Solar Renewable Energy Certificates and raised them a value of $480 per MWh of produced electricity. D.C. residents will also earn a personal property tax exemption for the entire value of their system.
For those who call D.C. home but live just over the state line in Maryland, a household rebate of $1000 is available for those who install solar, in addition to property and sales tax exemptions.
How Other Incentives Affect the Federal Tax Credit
Rebates, renewable energy certificates, and state credits may impact how you claim the federal tax credit.
Rebates from utility companies are subtracted from system costs before you land on your credit. So, on a $20,000 solar panel system with a $1,500 rebate from a utility company, you would first subtract the $1500 from the total cost (which gives us $18,500). The federal tax credit would then be 30% of the $18,500, not 30% of the entire $20,000. However, you don’t have to subtract rebates from the state government from your total cost before calculating the ITC.
Renewable energy certificates given in exchange for surplus renewable energy generated are typically considered taxable income, which would increase your total income, but would not reduce the federal credit.
State tax credits will usually not reduce federal tax credits. They will, however, increase your income on federal taxes because the amount of state income tax you have to subtract from your federal income will be lower.
Various solar power incentives and tax credits are available to those who install solar panels. The most significant is the ITC, which covers up to 30% of the cost of your system. In addition, many states, energy companies, and municipalities offer their own solar incentives. Be sure to research what solar power incentives are available to you to maximize your benefits when going solar.
You should always consult your tax professional to determine your eligibility for tax credits given your individual situation. EcoFlow does not guarantee any tax credit based on our products, and any information we provide is for educational purposes only and should not be considered legal advice. It does not constitute professional tax advice or financial guidance. It should not be used as the only source of information when making purchasing decisions, investment decisions, tax decisions, or execution. Consult a tax professional to evaluate your eligibility.