Update: As of August 2022, The Inflation Reduction Act passed by congress raises the Solar Tax Credit to 30% until 2032.
Introduction
For many years, residential solar energy was a luxury reserved for the wealthy and the well to do. In order to spur the industry, administrations within the federal government introduced a tax credit to ease the burden on homeowners with the desire to install solar photovoltaic panels on their home. Several years removed from the creation of the solar tax credit, the barrier to entry is much lower and it has become feasible for many homeowners before the credit is taken into consideration.
How does the federal tax credit work? Are there any conditions you need to meet in order to qualify? What if my state offers a credit on my state taxes, does that lower my federal rebate? Nobody likes talking about taxes, there’s a reason tax professionals are paid so handsomely to take the burden of filing one’s taxes off our hands. We’ll break it down and answer a few questions to help keep homeowners better informed.
This overview will focus on residential solar installations, some conditions may differ for commercial installations
Disclaimer: The following is an overview of the federal solar tax credit, this is not professional tax advice or professional financial advice. Consult a qualified professional prior to making applicable financial decisions or entering into binding contracts.
History
As is the case with most history of IRS codes, the history of the federal solar tax incentive is quite tedious, therefore it shall be kept brief.
The Solar ITC (Investment Tax Credit) was enacted in 2006. Since then it has gone through a series of revisions and extensions. In 2016, the Solar ITC was 30%, with the intention of being pared back periodically until August 2022 when the Inflation Reduction Act was passed by Congress which raised The Solar ITC back to 30% until 2032.
How does it work?
For many states, municipalities and power companies, there are many incentives and tax breaks to incentivize clean energy. In many cases, they do not affect the amount of the federal tax credit. You can inquire in your area and make sure you’re maximizing your cash back before redeeming smaller offers. Almost definitely, the Federal ITC will yield the most money back on your new solar power system.
A tax credit represents a dollar for dollar decrease in your tax liability. This differs from a tax deduction which decreases the amount of taxable income which determines how much you owe in taxes.
For our purposes here, let's say that The cost of a solar installation is $32,000, which is fairly average for some areas. This cost includes almost every aspect of the process. It includes all equipment including, all labor costs associated with installing the system and the costs of permits for the installation. All of these costs qualify for the tax credit, the entire $32,000 will be considered part of the installation as far as their taxes are concerned.
Stan and Jan’s system is being installed in 2024, so they qualify for the 30% tax credit. From here it is just simple math:
Cost of system X tax credit amount = Size of tax credit
$32,000 X 30% = $9,600
Stan and Jan are now entitled to a $9,600 decrease in their tax liability. If that exceeds the amount they owe in taxes, it will roll over to the following year until it is exhausted.
What’s the Catch?
In this case, there is no glaring catch other than a few key conditions:
You must own the solar power system, either through cash or financing, in order to claim the credit. Homeowner’s who lease their panels or sign a Power Purchase Agreement, or PPA, are not eligible.
Another key qualifier for the Solar ITC is taxable income. Individuals or couples filing jointly who do not have taxable income are ineligible for the Solar ITC. Unique situations can create circumstances in which the IRS deems nontaxable income such as those receiving disabled veteran benefits.
As stated above, consult with a qualified tax professional if you have questions about your individual situation.
How long does it last?
As of the writing of this blog article The Solar ITC at 30% will be in place until the year 2032, however there are few true guarantees in life and the circumstances could change. As just about anyone in the solar industry will tell you, there is no better time to investigate solar than right now! Lock in your Solar ITC by starting your solar journey today.
Making the switch to solar has been a great decision for millions of homeowners. Residential solar power has created incredible savings and helped reduce their carbon footprint. It may be of incredible value, even without the federal tax credit. Homeowners considering solar should be informed of all of their options for rewards and incentives including from state and local entities.
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