Understanding the Solar Investment Tax Credit “In this world, nothing is certain except death and taxes.” wrote Ben Franklin in
Understanding the Solar Investment Tax Credit
“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 30% tax credit for solar energy systems installed between 2022-2032. During 2032 they will drop to 26%. Systems installed in 2033 will receive a 22% tax credit. Unless renewed by congress, this tax credit will expire entirely for residential systems installed in 2034.
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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 30% 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 30% of that $10,000 cost will be directly discounted from your taxes.
In this case, it would be a savings of $3,000 from your income taxes.
To find out more, talk to a tax professional, and a solar installation professional to learn more about 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 investment tax credit is accounted for in a person’s income taxes.
The solar investment 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 the real savings between a tax credit and a tax deduction at a different amount.
The green bars represent tax credit savings and the gray bars represent tax deduction savings. The credits and deductions range from $1,000 to $5,000 in increments of $1,000.
As you can see, a tax credit results in a much greater discount on taxes than a tax deduction does. A deduction just changes the income being taxed, whereas a tax credit is a direct tax discount. A $5,000 tax credit results in a $5,000 discount on taxes. A $5,000 deduction for our fictional homeowner making $75,000/year only results in a $1,100 reduction in taxes owed!
This chart is just a basic example. Home and business owners can only know their tax savings after filing taxes and consulting with a certified tax professional that’s familiar with these laws.
What if the whole tax credit can't be redeemed in one year?
The solar investment tax credit can end up being a large sum. If your solar system cost $20,000 then your tax credit amount would likely be $6,000. Many homeowners wouldn’t have that much tax liability in a year.
Some people let this stop them from going solar, but the beautiful thing about the tax credit is that it can be rolled over from year to year.
This applies even if you didn’t have any tax liability in the first year that you got solar. Sadly the solar ITC isn’t a rebate. There’s not money that will be given back to a homeowner from the federal government. Maybe someday!
Has the solar tax credit been extended?
On December 27th, 2020, and then on August 12th, 2022 two separate acts were passed that allowed the solar investment tax credit to be extended. the first was a Covid relief package and the second is known as the inflation reduction act.
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 a decade!
This leaves the tax credit for residential solar at 30% until 2032. On January 1st of 2032, it will drop to 26%. On January 1st of 2033, it’s scheduled to drop to 22%. On January 1st of 2034, it will expire completely. This means no more tax credits.
Is there a limit to the federal solar tax credit?
The federal solar tax credit is based on a system of percentages. As mentioned previously, the current amount is 30%.
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 30% of that, or $3,000 will 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 installed up to code.
- File income taxes with IRS form 5695
There are tons of places where you can find more detailed information. Here are a few to start you off:
(800) 291-7652 10 Questions to Ask Before Choosing a Solar Installation Company You’ve bought a house, you’ve bought at least
(800) 291-7652 The 7 Steps of Going Solar People often ask us how solar works, and what they can expect