The Federal Solar Tax Credit: What You Need to Know [2024]
Could investing in solar energy pay off sooner than you think?
The short answer is yes.
Many residential home solar power systems are eligible for a federal solar tax credit (also called the Investment Tax Credit, or ITC).
At the time of this writing, you can get up to 30% of your eligible installation costs back by claiming the tax credit when you file with the IRS.
The ITC benefits residential and commercial customers, and there is no cap on its value.
If you’re wondering how the solar tax credit works in 2024, we cover everything you need to know in this post. Let’s dive in.
What is the Tax Credit for Solar Energy?
The ITC was born with the Energy Policy Act of 2005. It is a tax credit that both residential and commercial customers can claim on their federal income taxes for a percentage of the cost of a solar panel system.
While the ITC applies to a wide assortment of solar panel systems, there are a few requirements: the system must be placed in service during the tax year to be eligible, for example, and must provide power for a home or business in the United States.
How Does the Solar Tax Credit Work?
Like all tax credits, the solar tax credit provides a dollar-for-dollar reduction in the amount of income taxes you would otherwise pay.
For example, if you claim a $5,000 federal tax credit this year, you reduce your federal income taxes by $5,000.
Here’s a real-world example:
If you spend $20,000 on your solar panel system installation, you could be eligible for a 30% credit or $6,000.
Since the credit applies to your total tax liability, you’d subtract that $6,000 from whatever you owed at the end of the year.
According to the U.S. Department of Energy, the tax savings on the average residential solar installation can reach about $7,500.
Solar Tax Credit for 2023: What You Need to Know
New Solar Tax Credit Extension
Most recently, Congress passed the Inflation Reduction Act (IRA), which was signed into law in August of 2022.
The IRA increased the solar tax credit for residential solar power back to 30% (for a short time the ITC had been reduced to 26%) and extended it by 10 years.
Additionally, standalone residential battery systems with a capacity of 3 kWh or more, purchased after December 31, 2022, are eligible for the 30% ITC.
Consumers who want to make sure they receive the full 30% ITC can do so by working with a skilled solar installer, like Sandbar Solar & Electric in Santa Cruz, California, who fully understands the new ITC requirements and standards and can provide a compliant system installation.
What Does the Solar Investment Tax Credit (ITC) Cover?
The renewable energy ITC applies to “qualified expenditures” and allows you to reduce your overall tax liability.
In plain English, this means that you can calculate the amount of your claim based on costs such as:
Preparing the installation site, including conducting service upgrades to existing electric panels and replacing a section of the roof to hold the solar array
Installing wiring to the solar panel system
Assembling and installing the system
Adding solar PV cells or panels to power attic fans in a home
The costs of labor for onsite preparation, installation, assembly, and more – including developer and permitting fees and inspection costs
The cost of equipment like wiring, mounting materials, and inverters
Sales taxes on some expenses
Currently, the solar ITC is a one-time credit. One of its cooler features, however, is that you can carry over the excess to the next year (for up to five years) if you can’t use it all when you file.
For example, imagine that you only owed $5,000 in taxes but received the $6,000 home solar credit from the previous example.
You’d pay $0 in taxes for the year when you placed the claim. You’d also get to reduce your next year’s taxes by the remaining $1,000.
The ITC will remain at 30% through 2032. Beyond 2032, the ITC percentage begins to step down (see table below).
Ultimately, federal solar tax credit incentives are available at varying levels to homeowners who installed (or will install) a qualifying residential solar system between 2017 and 2034.
When it comes time to claim your solar costs, though, the actual percentage depends on the year your system was put into service.
Here’s a quick breakdown:
Does the Solar Tax Credit Cover Battery Backup Installations?
The passing of the Inflation Reduction Act set in motion a 30% Residential Clean Energy Credit, which covers the cost of solar equipment, installation, labor, and – yes – battery storage.
As with solar installations, the tax credit for battery systems will remain at 30% through 2032.
To qualify for the 30% credit, battery storage must have a capacity of at least 3 kWh and be installed “in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.”
Who is Eligible for a Solar Tax Credit?
The IRS has released extensive guidance outlining the requirements for utilizing the Solar Investment Tax Credit. To put it simply, the ITC applies to a range of renewable devices.
For solar power installations, such as panels mounted in your yard or on your roof, the system must meet a series of requirements.
According to the Department of Energy, these requirements are as follows:
The system must adhere to fire and electrical codes.
The system must provide electricity to a personal residence that you own but can be a primary or secondary residence in the U.S.
The system can be tied to an off-site community solar project if the electricity generated does not exceed or is credited against a home’s electricity consumption.
The system must be owned. This means the person claiming the tax credit purchased it via financing or a cash payment and is not leasing the system.
The system must be new. Currently, the tax credit can only be claimed on the “original installation” of a solar panel system.
As you can see, the eligibility rules can be a bit complex. The best way to stay between the lines is to hire a reputable solar energy installer like Sandbar Solar & Electric that can help you plan a project that satisfies the rules.
How Can I Claim the Federal Solar Tax Credit?
If you’re ready to take advantage of the ITC but not sure where to start, you’re not alone.
Here’s what you need to do:
1. Make sure you meet all the eligibility requirements
To claim the ITC, you must meet all eligibility requirements listed above, including that you must own (rather than lease) your system and that your annual tax liability must be high enough that the ITC can offset the amount of your tax payments.
Here’s what that means:
If you installed a solar panel system worth $20,000 on your home, the current 30% ITC would mean that you’re eligible for a $6,000 tax credit.
To claim that, however, you must owe at least $6,000 on your federal taxes before the solar tax credit kicks in.
If you owed more than that, the ITC would reduce your total tax bill. If you owed less than $6,000, the ITC would eliminate your tax liability for the year.
That said, the solar tax credit is not refundable, meaning the amount of the credit can’t exceed the total amount you owe on your taxes.
If you owe less than the ITC would save you for the year, you can, however, choose to roll the remaining credits over to the following tax year, which ensures you don’t lose the value of any remaining credits.
For example, if you were owed $6,500 in solar tax credits but only owed $4,000 on your federal taxes, you could take $4,000 from the solar tax credit for the following tax year.
This would eliminate your tax bill. From there, you could roll the remaining $2,500 forward, reducing your tax bill for the following year.
Remember that you can also claim the solar tax credit even if the solar panel system you’ve installed is not on your primary residence, i.e. you will be eligible for the ITC If you own the home and spend at least part of the year living in it.
If you rent out your home full-time you cannot claim the credit as a homeowner, but you may be eligible to claim the business ITC.
Regardless of where you’ve installed the solar panel system, you can only claim the tax credit once per solar installation.
For clarity, the solar ITC is defined as a tax credit, not a tax deduction.
2. Consult your CPA and fill out relevant forms
Once you’ve ensured all the eligibility statements apply to you and your system, it’s wise to talk to a CPA or other tax professional about the implications of claiming the tax credit.
Once you’ve talked to a tax professional, the next step is to fill out IRS form 5695 and add the energy credit information to the form 1040 you complete at the end of the year.
After completing IRS Form 5695, attach it to your federal tax return. Information and instructions on filling out the form are available here.
3. Add relevant credits to your 1040
Once you’ve filled out form 5695 and determined how much you’re owed in solar tax credits, enter that amount into your 1040 to reduce the amount you’ll owe on this year’s taxes.
Solar Tax Credit FAQs
1. If I meet all the requirements, can I claim the credit even though I’m not a homeowner?
Yes. Currently, the IRS allows non-homeowners to claim the credit.
If you’re a condominium member or tenant-stockholder at a cooperative housing corporation, you can still claim the tax credit if you have contributed to the cost of a qualifying solar panel system.
In that case, you could claim the amount you spent on the cost of the solar system as a tax credit.
2. Will I get a refund if the tax credit is larger than my tax liability?
The federal solar tax credit is a nonrefundable tax credit.
What this means is that, while you will not get a tax refund for more than you owe, you can carry over the unused balance of the tax credit to the next year (up to five years).
3. Can I claim the solar tax credit if I recently bought a home that already had a solar panel system?
The answer is yes – with some caveats.
If the system on your new home is new, meaning it has never been used before, you may be able to claim a tax credit on the expenses related to the system for the year that you move into the new home, as long as the builder has not already claimed the credit.
If the system has been used before, it will not be eligible for the credit.
4. Does my vacation home qualify for the tax credit?
Yes. Solar PV systems installed on vacation homes are eligible for a tax credit.
The catch is that you cannot claim the residential federal solar tax credit when you put a solar panel system on a rental unit you own, although (according to the Office of Energy Efficiency and Renewable Energy), “it may be eligible for the business ITC under IRC Section 48. See 26 U.S.C. § 25D(d), which specifies that eligible solar electric property expenditures must be ‘for use at a dwelling unit located in the United States and used as a residence by the taxpayer.’”
5. What were the tax credits in previous years?
2005. In 2005, lawmakers introduced The Energy Policy Act of 2005. This bill was responsible for creating the solar tax program and introducing a “25D” investment tax credit of up to 30% of qualified solar expenses. When the bill was introduced, the 25D credit was supposed to expire by 2006, but subsequent legislation eventually extended it for another year.
2008. Lawmakers passed the Emergency Economic Stabilization Act of 2008 in response to the economic crisis. This bill is sometimes called the “bank bailout.” The bill extended the ITC for eight years (to 2016) and eliminated the $2,000 credit cap.
2009. In 2009, Congress passed the American Recovery and Reinvestment Act. This bill reorganized and broadened the definitions of qualified expenditures and technologies, making more projects eligible for credits. It also created the Solar 1603 Grant program to supplement the ITC, although the funding for this program has since been exhausted. At its inception, the Solar 1603 Grant program provided payments where tax credits did not apply. The combined effect of these programs is credited with revitalizing growth and investment in the solar industry throughout the US.
2015. In 2015, Congress elected to delay the scheduled step-down in the ITC, which would have taken its value from 30% to just 10%. Instead, they established a decline schedule of 26%-22% for 2020-2021.
2020. In 2020, lawmakers chose to delay the ITC step-down schedule once more, thanks to the COVID relief bill. Before this decision, the value of the ITC was scheduled to decline to 26% in 2022 and 22% in 2023 before expiring in 2024.
2022. In 2022, Congress passed the Inflation Reduction Act, which allocated billions toward clean and renewable energy initiatives and added a 10-year extension of the ITC, keeping the rate at 30% until 2032.
6. Why Should I Go Solar Now?
Property owners who want to reduce their tax liability should install their solar systems as soon as possible.
Don’t forget the ITC relies on the date your system is placed into service (i.e., once your system is issued “Permission To Operate” by your utility), not the date you install it.
The ITC has changed over the years. At the beginning of its life, it included maximum limit caps that it’s since done away with.
Today, the program can be combined with other incentives, like the California Self Generation Incentive Program (SGIP), which can help lower the costs of installing a residential battery system.
Available to both commercial and residential users, the solar tax credit is a fantastic program that makes solar installation more affordable for those interested in it.
7. What else does the Inflation Reduction Act do for energy costs in California?
This extension makes rooftop solar panels, heat pumps, and other energy-efficient additions more affordable for California homeowners.
Here are a few other things the bill does for energy costs for California residents:
The bill directs $9 billion toward consumer home energy rebate programs that help people retrofit their homes with more energy-efficient appliances and features.
Finally, the bill introduces a consumer tax credit of up to $4,000 for low- and middle-income families and individuals to purchase electric or clean vehicles.
The bill introduces an EV tax credit worth up to $7,500, but there are qualification parameters. The amount you qualify for is based on your income tax and the size of the electric battery in your new car. The EV must also be assembled in North America. Learn more about these qualification parameters here.
The bill does all this by increasing taxes for billion-dollar corporations but does not raise taxes for families earning $400,000 or less annually or for small businesses.
Looking to Go Solar in the San Francisco Bay Area or Central Coast? We’re Here to Help!
After more than 20 successful years, Sandbar Solar maintains its position as the most established, locally-owned solar company on the Central CA Coast.
Our solar panel installation projects reduce your energy bills and increase your property’s market value. Solar panels for your home or business also make you an important part of the green solutions that help preserve our planet.
Our Santa Cruz solar services include free estimates and system recommendations, custom design, and expert installation. Our portfolio features thousands of residential and commercial solar panel installations across the region.
We’re proud of our reputation for designing and installing the most efficient solar panels for the Central Coast – including Santa Cruz and Monterey counties – as well as San Jose and the Bay Area.
If you’re thinking of going solar and you live on the Central Coast or in the South San Francisco Bay area, contact us today to get a quote for your project.
Disclaimer: Sandbar Solar & Electric is not a licensed tax organization, nor do we employ any licensed tax professionals. Therefore, Sandbar cannot provide our readers with tax advice. As with all tax-related topics please consult a certified tax professional to answer your specific tax questions related to solar & battery projects.
