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How Does The Federal Solar Tax Credit Work

Find out how the federal solar tax credit works. Get information on how to get a solar system with the solar tax incentives at SmartSolar.org.
Solar Panels
5 minutes
Written by:
Joey Cheek
Updated on:
January 13, 2023

How does the federal solar tax credit work? If you want to use solar power to keep your home powered and your water hot, an investment in a solar system could be the ideal solution. Though the investment in a solar panel system can seem expensive, it does not have to be when you learn how the federal solar tax credit works. Our team at SmartSolar.org can provide you with information about how to use the solar tax credit system and how you can get started today. Contact us to learn more.

What Is the Federal Solar Tax Credit?

The federal government has put in place a type of tax refund for those who purchase a solar system that generates electricity for their home. That is, if you buy a qualified solar PV system, have it installed on an eligible property, and then file a claim for the solar tax, you could lower your tax bill for the year. Here is what you need to know about how solar tax credits like this work.

Keep in mind that this information does not constitute professional tax advice. Be sure to talk to a tax professional about claiming the solar investment tax credit this tax year.

What is the solar tax credit?

The U.S. Department of Energy provides insight into what the solar tax credit is and how it works. It is a type of tax credit. That means it works to reduce your federal income tax liability for the year. It is a dollar-for-dollar savings, which means that you will be able to reduce your tax liability for the year by the amount you invested in the solar panel system up to the limits of the plan.

The current solar tax credit is an investment tax credit called an ITC. This is the residential solar panel tax credit. There is a different version that is applicable to businesses.

How much is the federal solar tax credit?

The federal residential solar energy credit is applicable only to your federal income taxes. You can claim the credit in the tax year you installed a solar panel system. The credit is a percentage of the cost of installing the solar PV system. You have to pay for the system to let you claim it on your taxes.

Here is a breakdown of how much of the cost to install a solar panel system can be claimed based on the year you installed it.

  • If you install a solar panel system in 2022, you can deduct up to 30% of the total cost of the system from your federal taxes.
  • If you install a solar panel system between 2023 and 2033, you will be able to qualify for a 30% deduction.
  • If you install a solar panel system in 2033, you will be able to deduct 26% of the total installation cost from your federal taxes.
  • If you install a solar panel system in 2034, you can deduct 22% of the costs on your taxes.

This incentive is meant to get more people to install solar panel systems and start using renewable energy right away.

What type of property will qualify for the solar tax credit?

Solar panel systems that are installed on a property that qualifies for the tax credit are:

  • Single family homes
  • Condominiums that you own
  • Mobile homes
  • Manufactured homes that meet federal guidelines

It is important to know that tax credits are only applicable to the person who actually installs them. You can't get the federal investment tax credit if you don't own the home and didn't pay to have the solar PV system put in.

Can you lease a solar panel system and get the solar incentives?

If you rent a solar panel system, you might not be able to get the credits for using renewable energy. That is because, even if it is your primary residence, you are not purchasing the actual solar equipment. As a result, you cannot qualify for the solar incentives.

Should You Consider the Investment in Solar Panels?

Reducing your taxable income saves you money. No one wants to pay more than they have to, and this investment tax credit is a very good reason to invest in them. However, there are other benefits to investing in solar panels.

  • Reduce your overall energy costs. Using renewable energy like this reduces your need to use electricity from your utility company, reducing your overall energy costs.
  • Solar panels are a type of environmentally friendly method. Electricity generated through this method does not hurt the planet through carbon emissions.
  • You can use a loan to purchase solar PV panels for installation and still get the tax credits. That means you do not have to have a large upfront payment.

There are a few things to remember. You will need to consider what the installation costs are. If your home needs a new roof or you live in an area where you may not be able to generate enough electricity to provide for all of your needs, it may not be as wise to make your move to solar.

Don’t Forget About State Solar Incentives

You may also be able to reduce your state income tax if your state offers any type of tax incentive or state tax credit. Many do, and that could help further reduce how much you have to pay to have solar installed.

Save Money and Let SmartSolar Help You

Investing in solar systems offers many benefits, and the dollar-for-dollar reduction in your taxes is worth it. Let SmartSolar help you get started before you file your federal tax return for the year. To get started, let us help you determine how solar energy can help you based on your home’s electricity consumption. Contact us now or take our SmartSolar quiz.

Joey Cheek

Meet the author:

Joey Cheek

Joey Cheek spent 10 years on the US National Speedskating Team where he competed in two Olympic Games, winning gold, silver, and bronze medals. He attended Princeton before diving into the startup and tech world. In 2011 he launched a livestreaming platform for sports before leading a team of engineers building next-gen news and content apps for Fortune 100 companies. He is the CEO and co-founder of SmartSolar.org, whose mission is to move the earth to cheap, abundant, carbon-free energy.

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