There's never been a better time to install solar panels for your home or business. Starting in 2023, the federal government is offering a tax credit to install new solar panel systems as part of a national effort to prevent . With these incentives, homeowners can reduce the amount of income tax they owe based on how much it costs to install a solar panel system.
After you install and pay for a solar PV system or battery storage technology, you can deduct up to 30% of the cost from the same year’s federal income taxes. Most homeowners in the US are eligible, and the federal solar tax incentive has been extended until 2032.
State solar tax credits work similarly, but not all states or regions may offer the same kind of incentive. State solar incentives may also include renewable energy certificates or rebates.
We cover what you need to know about solar tax credits at the federal and state level, along with the benefits of taking advantage of solar tax incentives.
What Are The Benefits Of A Solar Tax Credit?
Solar energy comes with several benefits compared to keeping traditional electrical systems. Here are some advantages to expect when installing solar panels.
Reduce the Cost of Solar Installation
With the solar tax incentives currently available, homeowners can get a significant portion of their monthly energy costs back. Everyone is eligible for up to a 30% deduction through the federal solar tax incentive. Even better, some states offer even better tax incentives.
Immediate Electric Bill Savings
Most solar-powered homes still consume some energy, but their electric bills usually amount to 10-20% of what they paid before. Additionally, some electric companies pay solar energy homeowners for excess generated power, and these savings add up throughout the solar energy system’s life.
Reduced Carbon Footprint
Solar power is a clean and renewable energy source. The solar tax credit makes it more affordable for homeowners to switch to clean energy and reduce reliance on fossil fuels. Not only can homeowners become more energy independent, but they can do their part for the planet and reduce carbon emissions.
Improved Home Value
According to Lawrence Berkeley National Laboratory, solar panels increased property value by around $15,000. Every region will have different appraisals, electricity rates, and markets, but it’s fair to expect most homes to increase in value after getting solar energy.
Install More Renewable Energy Systems
The federal solar tax credit covers more than just solar panels. It also covers fuel cells and battery storage technology. It’s possible to save even more by installing additional clean energy systems. Also, there is no limit to how much these incentives can help and 30% of them can be used as a tax credit.
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Federal Solar Tax Credit Incentives
The US federal government’s solar tax credit is known as an Investment Tax Credit (ITC) and reduces your annual income taxes dollar-for-dollar. In August 2022, congress passed a revisal of the ITC, making consumers eligible to claim 30% of the cost as a tax credit. For example, if the solar panel installation costs $10,000, homeowners can expect a $3,000 tax credit on the same year’s tax filing.
This incentive will last until 2032 and covers several clean energy systems. Homeowners can use the ITC for solar panels (photovoltaic systems), fuel cells, battery storage technology, electric panel upgrades, and other energy-efficient improvements.
For new solar panel installations, homeowners must meet the following criteria to be considered for the 30% federal solar tax credit:
- You must own the residence.
- The solar panels were installed between December 31, 2019, and 2032.
- You purchased or financed the solar energy system (i.e., not leased and used for household consumption).
- The solar tax credit will only cover the original installation.
Most of the costs of installing solar panels are covered by the federal tax credit. Homeowners can expect to report costs for equipment, labor, wiring, inverters, energy storage devices, sales tax, and other expenses related to solar energy installations.
If you get a rebate from your electric company, it usually has to be taken out of the tax credit you can get from the federal government. However, state tax incentives and renewable energy certificates usually don't reduce federal solar tax credits, but they may be reported as taxable income.
The federal solar tax credit incentives can reduce the total cost of solar installation by up to 30% by itself through tax savings. Additionally, state and utility company incentives make solar installations even more affordable for homeowners.
State Solar Tax Credit Incentives
Several US states and territories offer similar solar tax credits, but each one will have different incentive programs. California, Texas, New York, Minnesota, and Florida all have dozens of state solar incentive programs for residents and business owners. Most of these programs offer financing, rebates, corporate tax credits, personal tax credits, and sales tax incentives for new energy-efficient systems. Homeowners can research state incentives for renewables and efficiency or speak with their solar installer to learn how to lower the total cost of installation.
It’s possible your state government may offer you a solar renewable energy certificate (SREC or REC). After you install and register your solar panel system with the appropriate state authorities, they’ll monitor your energy production and consumption. Occasionally, they will issue an SREC, which you can sell to your utility company, resulting in extra income.
In other cases, your state may offer a tax credit or government rebate. A state solar tax credit works like the ITC, but it is used for state income tax instead of federal. State tax credit incentives generally do not reduce the federal tax credit. State government rebates typically pay you a certain amount based on the solar installation cost, possibly between 10%-20%. However, rebates may count as taxable income.
Because each state has different solar tax credit incentives, it’s best to check with each program to determine the requirements, such as if there’s a maximum claim amount or restrictions on certain equipment types.
Once you’ve learned of your state’s solar tax credit or rebate program, you’ll be able to save thousands on the cost of a new solar installation. When paired with federal solar incentives, homeowners can expect to save anywhere from 30% to 50%, not to mention the electric bill savings.
Frequently Asked Questions
How does the federal solar tax credit work?
The federal solar tax credit, also known as an Investment Tax Credit (ITC), is a dollar-for-dollar incentive that reduces the total cost of solar installations by up to 30%. When a homeowner puts in a solar energy system, they can claim the costs of installing it on their tax return for the same year.
How does the IRS verify a solar tax credit?
The IRS verifies solar tax credits with Form 5695, which is added to your Schedule 3 and Form 1040. For a solar tax credit to be valid, the IRS also needs to know how much your home's electricity costs. It’s best to keep a record of all invoices and payments related to solar installation costs for tax reporting.
How much does the US spend on solar subsidies?
Columbia Climate School reports that the federal government spent around $6 billion in renewable energy incentives in 2016, but the figure by now is likely higher and changing. It’s estimated that the solar investment tax credit (ITC) will cost another $7 billion from now until 2030.
What is the 2023 tax credit for solar?
In August 2022, congress passed a revisal of the federal solar tax credit or the ITC. From 2022 until 2032, homeowners may qualify for a 30% federal tax credit after paying and installing a new solar panel system. US states and territories may also offer their own tax credits for solar.
Can you claim solar tax credit every year?
Solar tax credits are generally only one-time tax incentives, so it’s not likely that you can claim them every year. These solar tax credits are for new installations, but if you install solar on more than one property, you may be able to get more.
Who qualifies for the federal solar tax credit?
Any homeowner in the United States qualifies for the federal solar tax credit. After paying for and installing a solar energy system, homeowners can claim up to 30% of the costs on the same year’s tax return as a tax credit. However, solar energy systems cannot be leased or used commercially.
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Meet the author:
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.
