Even though the cost of a solar energy system has plummeted in the last decade, installing solar panels on your house still requires a significant upfront investment. After all, a home solar panel system costs roughly $16,000 to 20,000 without energy storage batteries. Thankfully, there is a federal solar tax credit that can reduce the total system cost by $4,800 or $6,000 for installations in that price range. The federal solar tax credit significantly boosts the return on investment of the solar system by lowering the total project cost.
There is a 30% solar tax credit available for solar systems installed through 2032, starting with solar energy systems installed in 2022. Eventually, it will taper down to 26% in 2033 and then 22% in 2034.
Let’s examine how to apply the solar tax credit and if you can benefit from it.
Editor’s note: We updated this article on September 26, 2022, to reflect changes to the solar tax credit due to the passage of the Inflation Reduction Act of 2022.
What Is a Federal Tax Credit?
Tax credits are a dollar-for-dollar reduction in income taxes owed to the federal government or Internal Revenue Service. For example, a $4,500 tax credit lowers your income tax liability by $4,500. However, the tax credit has no value to you if you have no tax liability.
By contrast, a tax write-off or deduction lowers your total taxable income, so it is quite different from a tax credit. Unlike a tax credit, the value of a write-off depends on your tax rate. So, tax credits are more valuable than a tax write-off of the same amount; a $4,500 tax credit is worth far more to you than a $4,500 tax write-off.
What Is the Federal Solar Tax Credit?
The federal government offers a solar tax credit for residential and commercial solar panel systems. However, the tax credit is only available to the owner of the solar energy system, so it doesn’t apply if you lease your system or enter into a power purchase agreement (PPA).
To qualify, you must install the system on a primary or secondary residence (for residential applications), so renters, unfortunately, are not eligible. Also, the solar panels, inverter, and equipment must be new. Therefore, used solar equipment doesn’t qualify for the tax credit.
The solar tax credit is available for 30% of the total system cost including the solar panels, inverter, other equipment, labor, and permitting costs. Thanks to the passage of the Inflation Reduction Act of 2022 (IRA), the Solar Investment Tax Credit (ITC) will continue according to the following schedule:
How Do I Apply the Federal Tax Credit?
It is critical to speak with a tax expert who understands your situation to ensure you can take advantage of the credit.
If you qualify and you install a solar system in 2022, you can apply the tax credit when you file your 2022 federal taxes. You will need to complete IRS Form 5695 and attach it to your federal tax return when you file your taxes. Because you apply the credit on your tax return, you won’t see the savings instantly; it is not a cash rebate.
In addition, some states also have state solar tax credits that can be applied when filing your state income taxes. Refer to the DSIRE USA database by the NC Clean Energy Technology Center for information on local solar incentive programs, including state property tax exemptions and utility rebate programs.
Are There Other Incentives for Installing Solar Panels?
Depending on where you live, a variety of local solar incentives may be available to you, including utility company programs and tax exemptions.
Solar Property Tax Exemptions
Studies show that homes with solar systems sell for more. Your solar system will increase your home’s value because solar-powered homes have lower utility bills. But several states have property tax exemptions to ensure that solar homes aren’t assessed for higher property taxes due to the solar system.
In other words, installing solar panels won’t cause your property taxes to increase in certain states, including Arizona, Colorado, Connecticut, Florida, Texas, and Wisconsin.
If your utility company offers net metering, also known as net energy billing, you will get credits on your electricity bill for surplus power you feed to the power grid. Then when you need more electricity than your panels are producing, perhaps on a cloudy day or at night, you can offset this use with your credits. Many states have net metering laws requiring utility companies to offer this arrangement.
Solar Sales Tax Exemption
Many states apply a tax for consumer purchases ranging from 2.9% to 9.5%. However, there are currently 25 states that offer a solar energy sales tax exemption for going solar, including Arizona, Florida, Iowa, Maryland, Massachusetts, New Mexico, and New York. This sales tax exemption applies to the cost of the solar panels, inverter, battery bank, and installation.
Before installing solar panels, it’s helpful to understand all the solar incentives available, so you can take advantage of them. There may be local solar policies that can reduce the upfront cost of installing a solar system or create greater utility bill savings.
Feature image courtesy of Montgomery County Planning Commission (CC BY-SA 2.0)