How to Apply for a Tax Credit for Solar Panels

What is the Federal Solar Tax Credit?

The federal solar tax credit is called the Residential Energy Efficient Property Tax Credit under IRS Code 26 U.S.C. 25D. As a tax credit, it reduces the amount of your federal income tax liability, or the amount of money you owe to the federal government based on your income earnings for that year.

This tax credit falls under the Inflation Reduction Act, and it is designed to provide property owners with a way to lower their taxes when they invest in highly efficient solar energy systems for their homes. The act allows you to save money—up to 30% of the cost of solar panel installation for your home—on your federal income taxes.

How does the solar tax credit actually work?

The solar tax credit from the federal government allows you to deduct up to 30% of the cost of installing a solar panel system on your residential property. You claim this credit when you submit your taxes for the tax year in which you invested in the solar panel system, as noted by the U.S. Department of Energy. Though you cannot get free solar panels from the government, this is one way to save big.

Non-refundable tax credit

This is a non-refundable tax credit. That means that it will help to lower how much you owe the federal government in taxes for that year, dollar-for-dollar, but it does not lead you to a refund if the credit is more than the taxes you owe for that year.

It is possible to roll over the excess credit you qualify for from one year to the next, which can help you save more money on your taxes. Here’s an example:

Let’s say you owe the IRS $7,500 for the year in federal taxes. You install a solar panel system and qualify for a 30% discount on the total cost. You spend $10,000 to install the solar panel system on your home. That means you qualify for up to $3,000 in a tax credit. This lowers your IRS tax bill to $4,500 for that year.

Now, if you installed a much more valuable system or owed less in taxes, anything extra could roll over to the next tax year, assuming that there are still solar tax credits available.

Limits on claims

One of the best things about the solar panel federal tax incentive is that there are no limits on how much you can claim. You get 30% of the total cost of the solar panel system’s installation and labor costs. You can apply as much of that towards your federal taxes as you owe. There is no upper limit to this amount.

Income limits

Another important part of the solar tax credit is that there are no income limits. That means that any taxpayer who owes federal income taxes may be able to claim this tax credit for the year they install the system. There is no upper limit to this. The only real limit is that you have to be the original owner of the solar panel system, it must be installed on a U.S. home, and it also must meet the energy efficiency guidelines set by the IRS.

Limitations on When You Can Claim the Credit

The solar tax credit is specific to those who purchase and install solar panels on their residential property. If you decide to lease the solar panel system from the installer or a solar panel company rather than buy it, you do not qualify for this tax credit.

That means that if you are using a power purchase agreement, which is a common term for a solar lease, you are not eligible. In leases, you do not own the equipment itself. Rather, the solar company owns it, and you pay for the energy you use from it.

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What Types of Homes Qualify for the Solar Tax Credit?

The federal solar tax credit applies to the installation of a solar panel system on most types of residential homes. This includes:

• Single-family homes
• Mobile homes that you owe
• Houseboats 
• Cooperative apartment properties
• Condominiums that you own
• Manufactured homes that meet the Federal Manufactured Home Construction and Safety Standards

If you are unsure if your home qualifies, it is best to contact your tax professional to inquire. Most types of owned homes in the U.S. that meet federal guidelines will qualify for the tax credit.

What Costs Are Included in Solar Panel Installation Tax Credits?

The federal solar tax credit applies to most types of costs related to the installation of a solar panel system on your home. However, there are some qualifications that must be met, according to the U.S. Department of Energy:

• The solar photovoltaic solar panels or PV cells purchased.
• The balance-of-system equipment, which typically includes the mounting system, inverters, and wiring necessary to run power to the system.
• All solar panel installation costs are from the contractor or solar panel installer. This includes costs related to the preparation of the rooftop or home, the assembly of the system, and the overall cost of the installation. This includes all permits that you have to obtain, developer fees, and inspection costs.
• The cost of all energy storage devices that meet the requirements. Generally, this applies to all storage solutions that have a capacity rating of at least 3 kilowatt-hours or higher.
• The sales tax you pay when you buy the system and have it installed.

Other Ways to Save on Solar Panel Systems

The federal solar tax credit is one that is given to you by the federal government, but other options for savings may exist as well. This includes:

• State solar tax credits: Your state may offer an income tax savings option for solar panel installation. Availability, as well as the overall amount of potential savings, will differ from one state to the next.
• Renewable energy certificates: Some electricity utility providers will offer a renewable energy certificate to you for installing the system. This is a type of tax income that you will later need to report to the state and federal governments. It does not reduce your federal solar tax credit, though.‍
• State rebates: Some states also have a rebate program that could help you lower the cost of your state taxes by a set amount if you install energy-efficient systems like a solar panel system.

How to Get the Tax Savings You Deserve

The solar tax credit from the federal government, as well as those available at the state level, are designed to reduce the taxes you pay to the government. Most people pay these taxes every year, and some of those taxes come out of your paycheck each week.

Remember, just because you don’t pay the federal government at tax time doesn’t mean you don’t have a federal tax liability. You are paying toward that liability throughout the year. That means that if you are eligible for the tax credit, you should file it.

To file and get the solar tax credit, follow these steps:

• Be sure to work with a solar company to install a qualified solar energy system on your home. It has to meet the requirements set by the credit-issuing agency.
• Complete IRS Form 5695, Residential Energy Credits. Submit this form to the IRS at the time of filing your taxes for the tax year in which the system was installed.
• Fill out the rest of your Form 1040 as you normally would for filing your federal income taxes.
• Follow the same steps for your state, ensuring that you find the specific tax forms for any state income tax credit or rebate you may qualify for that year.

Always consult with a tax professional to ensure you are getting full credit and not overpaying. You may be able to roll over some of the costs associated with the tax credit if you cannot use them all in the year you file your claim.

SmartSolar Can Help You Find Solar Panel Installation Near You

Solar panel installation is one of the best investments you can make for your home, and investing in a quality system will save you money in the long run. Still, there are ways to save money on solar panel systems during the purchase and installation processes themselves. For that reason, it is always worthwhile for you to tap into our resources to help you find the most affordable options available.

Take the homeowner quiz to find out if solar panel installation is right for you