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 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 2022, we cover everything you need to know in this post.
Let’s dive in.
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.
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, 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.
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 to 30% 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.
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:
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 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. The tax credit 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.”
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:
As you can see, the eligibility rules can be a bit complex. The best way to stay in 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.
If you’re ready to take advantage of the ITCbut not sure where to start, you’re not alone.
Here’s what you need to do:
To claim the ITC in 2022, 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 in 2022, the 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 2022.
If you owe less than the ITC would save you for the year, you can 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 2022. This would eliminate your tax bill. From there, you could roll the remaining $2,500 into 2023, 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.
Regardless of where you’ve installed the solar panel system, you can only claim the tax credit once per solar installation.
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.
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.
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.
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 next year.
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.
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.’”
Property owners who want to reduce their tax liability in 2022 should install their solar systems before the end of the year.
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, which can help lower the costs of installing a residential solar power 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.
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 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.
After more than 18 successful years, Sandbar Solar maintains its position as the most established, locally owned solar company in Santa Cruz.
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, 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.
Jeremy has worked in the solar industry since 2006. He has a Bachelor’s Degree from UC Santa Cruz in Environmental Studies. Jeremy has spent most of his solar career in residential sales and Sales Management in both California and Hawaii. He was raised in Santa Cruz County and is passionate about helping local residents make the switch to clean and reliable renewable energy. Jeremy lives on the Westside with his wife and two boys and enjoys music, photography and hiking in his personal time.
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