Understanding the Federal Solar Investment Tax Credit
February 18, 2022
“…in this world nothing is certain except death and taxes.” wrote Ben Franklin in a 1789 letter. None of us can avoid death, but at least there are some ways we can reduce our taxes. The Solar Investment Tax Credit allows you to do just that!
The Federal Solar Tax Credit provides a 26% tax credit for solar energy systems installed between 2020-2022, dropping to 22% for systems installed in 2023. Unless renewed by Congress, this tax credit will expire entirely for residential systems installed in 2024.
There is no guarantee that Congress will extend this tax credit. Homeowners across the United States are taking advantage of higher tax credit rates before they continue to drop.
Is the Solar Tax Credit a Discount on Solar Panel Installation?
No, although it is a saving on taxes. After discussing this with a certified tax professional you might learn that all or part of your solar energy system is eligible for this 26% tax credit.
So, what does this mean? If a system costs $10,000, the tax credit will come into effect when it’s time to pay income taxes. This means that up to 26% of that $10,000 cost will be directly discounted from your taxes.
In this case it would be a savings of $2,600 from your income taxes.
To find out more, talk to a tax professional, and a solar installation professional to learn more on the costs of a system, and potential tax savings. There are many factors that will influence these amounts in each case.
Solar Tax Credit vs. Tax Deduction: What you Need to Know
For residential customers, the Federal Solar Tax Credit is accounted for in a person’s income taxes.
The Solar Tax Credit can be highly lucrative. It’s important to note that it functions differently from a tax deduction.
A tax credit is a dollar-for-dollar amount that is removed from the final amount of taxes that you need to pay. A deduction is an amount that doesn’t have to be counted as part of your income taxes.
A tax credit is almost like an IRS gift card. It’s equal to an exact amount of money, but can only be claimed with the IRS. It is NOT going to be paid out to you in a tax refund. It’s a credit you can put against your tax costs for a direct discount.
There is a significant difference in the savings from a tax credit and the savings from a tax deduction. This chart demonstrates the difference between a $1,000 tax credit and $1,000 tax deduction for a person paying 22% taxes making $75,000/year. It goes all the way up to $5,000.
The green bars represent the amount you would save with a tax credit, and the gray is the amount you would save with a tax deduction.
At the $1,000 mark, our fictional taxpayer is saving $1,000 on taxes with a tax credit and only $220 with a tax deduction. By the time the credit/deduction reaches $5,000 the savings don’t even compare! Our taxpayer is saving $5,000 with a $5,000 tax credit, and only $1100 with a $5,000 tax deduction.
This chart is just a basic example. You can only know your tax savings after filing taxes and consulting with a certified tax professional.
Has the Solar Tax Credit Been Extended?
On December 27th, 2020, a COVID relief package was passed into law. This included a $2.86 billion budget for Energy Efficiency and Renewable Energy.
This, in part, allowed for an extension of the ITC or the Solar Investment Tax Credit. This relief package delayed the phasedown of federal solar tax credits by two years.
This leaves the tax credit for residential solar at 26%, but only through 2022. On January 1, 2023 it’s scheduled to drop to 22%. On January 1, 2024 it will expire completely. This means no more tax credit.
Is there a Limit to the Federal Solar Tax Credit?
The Federal Solar Tax Credit is based on a system of percentages. The current amount for a system installed in 2022 is 26%.
According to this energy.gov article on the Solar Tax Credit, “There is no maximum amount that can be claimed.”
This means that if a system costs $10,000, then 26% of that, or $2,600 will then be offered as a tax credit.
If a system costs more than that, the amount of tax savings can go up in proportion to the amount spent on the solar energy system.
How do I Get the Solar Investment Tax Credit?
Simple. Download our easy-to-read 1,339 page guide.
Just kidding!
It’s not that bad. The solar tax credit can only be received after the installation of a solar energy system takes place and taxes are filed.
To get it:
- You must be the homeowner.
- Get a system estimate from a solar energy expert.
- Consult with a licensed tax professional on the tax benefits you are eligible for.
- Have the system professionally installed.
- File income taxes.
We’ve been installing solar energy systems since 2008. Since then we’ve completed over 8,000 solar jobs. As you investigate solar, feel free to leverage our experience.
Check out our Solar School and YouTube channel. There we offer loads of resources to address the most common questions and concerns about solar energy systems.
At Big Dog Solar we have a team of dedicated solar engineers, solar energy system consultants, professional installers, and a whole office staff dedicated to solar energy technologies. We’re happy to share our knowledge with you before you take the dive into the solar world.
Check out more resources for solar energy systems on our YouTube channel, or keep browsing articles on our website. You can also meet with one of our solar energy consultants to learn more about the benefits solar can have for your home, or business.
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