How Does the Federal Solar Tax Credit WorkSolar panels are a great way to lower your energy bills and carbon footprint. But while they provide great long-term savings, their short-term costs are high. A solar PV (Photovoltaic) system can cost up to $16,000 to purchase and set up. That’s a lot of money for most homeowners. To help encourage them, congress is offering tax credits to every American who installs them in their home. So, how does the federal solar tax credit work?

What is the Solar Tax Credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax paid to the government at the end of the year. The solar tax credit, also known as the Investment Tax Credit (ITC), covers a percentage of the cost of your solar panels. When the credit initially passed, homeowners were allowed to write off twenty-six percent of their costs.

However, when congress extended the credit in 2022, they raised it to thirty percent for any system installed between 2022-2032. The credit will revert back to twenty-six percent in 2033 and then to twenty-two percent in 2034, before expiring in 2035, unless congress extends it again.

Who is Eligible?

The credit is available to anyone who installed or will install a solar panel system between January 1, 2017 and December 31, 2034. However there are some stipulations. The system must be:

  1. Located at your primary or secondary residence in the United States.
  2. New or being used for the first time. Previously used systems don’t qualify.
  3. Purchased by the homeowner, through either a cash payment or finance plan. Anyone leasing solar panels is not eligible. Homeowners who purchase an interest in an offsite solar project are also eligible, as long as the electricity it generates is credited against, but doesn’t exceed, their home energy consumption.

Because they capture energy from the sun, solar water heaters are eligible for the solar tax credit as well. Solar systems can only be claimed once, so keep careful track of expenses and receipts. Anything missed can’t be claimed on next year’s tax returns.

What is Covered?

Federal solar tax credits apply to every expense required to set up a solar system in your home. This includes:

  • Purchase costs
  • Sales tax
  • Labor costs, including fees and inspections
  • Equipment (inverters, wiring, mountain hardware, etc.)
  • Batteries, though batteries purchased after 2022 must have a capacity rating of at least three kilowatt hours to qualify

Because utility rebates aren’t counted as income, any subsidies offered by your local electric company for installing solar panels have to be subtracted from your overall costs before applying the federal tax credit. In other words, if you spent $10,000 buying and mounting your solar panels, and were offered a $1,000 rebate from your utility provider as an incentive, your federal tax credit would be:

($10,000 – $1,000) x 0.30 = $2,700

However, state subsidies don’t affect federal subsidies. So if your state government gave you $1,000 to help install solar panels in your home, then your federal tax credit would remain the same.

$10,000 x 0.30 = $3,000

Additionally, if you received payments for excess electricity delivered to the grid (i.e. your solar panels generated more power than you consumed), these are considered income, which means you don’t have to subtract them from your tax credit.

How to Claim Your Federal Solar Tax Credit

Claiming your solar tax credit is a straightforward process. First, download IRS Form 5695. Your solar panels will be filed under “qualified solar electric property costs” (line one). If you installed any other DIY energy projects, such as a solar heater, wind turbine, thermal heat pump, or biomass generator in your home, include them on lines 2-5. Then add lines 1-5 and enter the total on line 6a. Multiply by thirty percent (if the projects were completed after 2022) and enter the final number on line 6b. That’s your federal solar tax credit.

But while there is no limit to the amount you can claim, there is a limit to how much you can receive in one year. Credits are deducted from your tax liability. So if the money you owe the IRS is less than the amount you earned through your tax credit, then the remainder will carry over to the following year. In other words, if you owe the government $2,000 but received $3,000 in credit, you’ll deduct $1,000 on your next tax return.