Adding a solar panel system to your home is a significant investment, but eventually, those solar panels will pay for themselves and start saving you money. Luckily, the federal solar tax credit, state credits, and rebates could help ease the pain in your wallet.
If you’re considering adding a solar panel system to your home, the solar tax credit is likely one of your many questions. There are several credits available, depending on your region or state, and the federal credit just changed thanks to the Inflation Reduction Act signed into law. Here’s what you need to know.
How Tax Credits Work
First, we want to explain how tax credits work to clear up any potential confusion. A tax credit is a dollar-for-dollar reduction to the income tax you owe. For example, claiming a $5,000 federal tax credit will reduce your total federal income taxes due by $5,000.
While a tax deduction only reduces the amount of your income that gets taxed, a credit will directly reduce your total tax, which is a big difference. Additionally, the federal solar tax credit is often referred to as an ITC (investment tax credit), and some places use the term interchangeably.
What is the Federal Solar Tax Credit?
The solar federal tax credit (or ITC) started in 2006 and was set to expire in 2024. However, just like the EV tax credit extension in the Inflation Reduction act, solar incentives also received a 10-year extension and upgrade.
In December 2020, Congress extended the original solar credit through 2023, giving those in the U.S. up to a 26% tax credit for systems installed in 2020-2022. Instead of dropping to 22% and ending in 2024, it’ll stay until at least 2032, and the credit is 30% effective immediately.
Those who take advantage of the federal solar tax credit can get a dollar-for-dollar reduction of up to that 30% on taxes starting in 2023, and we’re not yet sure if previous purchases will remain at 26% or retroactively get the 30%. Either way, considering a solar system can easily cost upwards of $15,000-$20,000, and even more when you add on labor costs, etc. This is why the tax credit is such a big deal.
And no, before you ask, if your solar tax credit is more than you owe in taxes, you will not get a refund for the difference. Thankfully, your tax credit can be split up and deducted from federal income taxes over several years, and thanks to the extension, many can take advantage of that.
What’s All Included In the Credit?
Another misconception about the solar ITC is that it only includes the cost of solar panels. When, in fact, it covers an entire host of things. You’ll want to save receipts and have records of everything.
Expenses allowed in the federal solar tax credit include the cost of solar panels, all labor costs (like assembly, installation, permit fees), mounting equipment, energy storage devices like a battery, wiring, inverters, and even sales tax. When you combine it all, that can be a significant investment on which you’ll want a credit.
Solar Tax Credit Eligibility
There are only a few eligibility requirements to take advantage of the current federal solar tax credit. However, we’re unsure if any new provisions were added with the extension and will update as we learn more.
Eligibility requirements include:
- Bought between January 1st, 2006, and December 31st, 2023. (Now extended to 2032)
- The solar PV system is new or used for the first time (original installation only).
- You must own or finance the system (no leases).
- The solar panel system location must be at your primary or secondary U.S. residence.
- Available in the United States only.
Other Solar Incentives and Rebates
And finally, we want to mention that there are both state and federal tax credits, rebates, local utility rebates, special tax exemptions, battery incentives, and renewable energy certificates (SRECs) available once you go solar. Basically, homeowners have a lot of options when it comes to solar.
While the federal solar tax credit is huge, several states (including Puerto Rico) offer additional incentives you can stack on top of the federal ITC. However, these can vary wildly by state, so you’ll want to do your own research on the Database of State Incentives for Renewables to learn more.
That said, states with the best solar incentives include New York, Rhode Island, Connecticut, Maryland, Colorado, and others. Both California and Texas have favorable solar incentives as well.
Some states even offer up-front rebates that will help offset the cost of solar, but these typically don’t last long. Plus, they typically will not reduce your federal solar tax credit, which is good news. Then, solar power systems and their components are exempt from state sales taxes in select states, saving you money.
Additionally, another state discount is SRECs. Once you register your solar panel system with the state (if applicable), the state will track its production, and you may receive solar renewable energy certificates. Owners can then sell those to the local energy company.
Local utility company rebates are readily available, but you’ll want to do more research on those. These can be discounts, rebates on energy bills, or even performance-based incentives that’ll pay you a credit on each kilowatt-hour. Keep in mind that most local utility company rebates are excluded from income taxes, and any rebates you receive for installing solar will be subtracted from your total system costs before you calculate your tax credit. This means you’ll have a lower total dollar amount towards the federal tax credit.
The Inflation Reduction Act also added a tax credit for home battery units with more than 3 kilowatt-hours of storage capacity. Homeowners with a solar using a battery storage system when the sun isn’t shining may qualify for other credits.
Give Solar a Try
As you can see, several federal, state, and local incentives exist for switching to solar and investing in renewable energy sources for your home. When you start adding up all the different costs, these incentives can save you tons of money on the entire system.
With the switch to solar being so expensive, you’ll absolutely want to take advantage of the 26% federal solar tax credit. Plus, now that the new incentive is 30% and extended by a decade, you’ll have plenty of time to apply for those tax credits over 2-3 years.
So, what are you waiting for? Give solar a try.
