Federal Solar Tax Credit: Homeowner’s Guide 2023

The Federal Solar Tax Credit is an incentive for all U.S. solar panel owners, designed to save you money off your tax bill. In this article, we’ll share all the factors involved in the application process, eligibility and requirements, how it works, and more.

What is the Federal Solar Tax Credit?

The Federal Solar Tax Credit is great if you’re thinking about going solar, as it enables you to claim back 26% of your solar panel system that’s been installed in 2020–2022. For systems installed after 2023, you’ll receive 22% tax credit, while solar installations made before December 31, 2019, were eligible for a 30% credit.

Until Congress renews the extension of the ITC, the tax credit will expire at the beginning of 2024.

How Does a Tax Credit Work?

If you’re a homeowner, you can claim the Solar Tax Credit for the total cost of your solar panel’s equipment and original installation to reduce the amount of money you owe when filing your federal tax return.

Check out: Best solar panels for homes.

The credit received is calculated to apply a tax deduction for that tax year. For example, if you receive $500 in credit, you’ll owe $500 less in your tax payments.

It’s worth noting that a tax credit isn’t the same as a tax refund since you must owe taxes to the federal government to receive a dedication. In the event that you don’t owe any tax money, you wouldn’t receive any money for your tax credit. Additionally, this tax credit can be used against minimum tax or federal income tax, so you’ll be able to claim money off your tax bill for your solar energy.

What is Covered by the Federal Tax Credit?

At the time of writing this article, you’ll receive a 26% tax credit on your current tax bill.

Eligibility Requirements for the Federal Solar Tax Credit

There are many homeowners with a variety of properties who are eligible for the Federal Solar Tax Credit. In fact, those who own mobile homes, apartments, condominiums, and manufactured homes can apply.

Additionally, you can claim the Solar Tax Credit for rental properties, although you might reside there for at least a portion of the year. For this circumstance, you need to calculate a percentage of what you can claim depending on how much time you spend in the rental property every year.

On the other hand, those who lease their solar panel system or have a Power Purchase Agreement (PPA) aren’t eligible for the Solar Tax Credit. If you don’t own your solar equipment, you aren’t eligible to make any claims.

Here are the following criteria:

You installed, or intend to install, a solar project between January 1, 2006, and now.
The solar system is installed on your primary or secondary place of residence.
You haven’t leased a solar system or signed a PPA.
The solar system installed is new or used for the first time (you can’t apply if it was previously installed in your primary residence before you moved in).

Who Qualifies for the Solar Tax Credit?

To be eligible for the Solar Tax Credit, you must:

Be located in the United States
Own your solar system (no leasing or PPA)
The system must be in the United States

Expenses Included in the Federal Solar Tax Credit

The following factors are expenses included in this tax credit:

Sales tax on expenses.
Energy storage devices used for your solar panels.
Labor costs for preparation, installation, inspection, and developer fees.
Solar panel or PV cells costs.
Equipment (including inverters, wiring, and mounting accessories)

Other Solar Incentives, Rebates, and Tax Credits

Aside from the Solar Tax Credit, there are other incentives and rebates to owning your own solar panels. Below, you’ll find a selection of the ones to look out for.

State Government Solar Rebate

The State Government Solar Rebate allows each U.S. state to offer an incentive that’s unique to them and can be different from offerings in other states.

Electric Utility Rebate

This program provides incentives for solar equipment installations that meet the necessary requirements.

Payments from Renewable Energy Certificates (SRECs)

SRECs are performance-based solar incentives that let you earn money based on your solar energy generation. If you’re a homeowner, you can earn one SREC for every megawatt hour of electricity that your solar panel creates.

State Tax Credits

There are unique incentives based on your location in the U.S. Below are the incentives for each U.S. state:

Arizona: 25% state solar credit with a maximum of $1,000 personal income tax reduction.
California: Single-Family Affordable Solar Housing (SASH) Program: Low-income homeowners who receive their electricity from PG&E, SCE, or SDG&E could qualify for cash incentives for every kilowatt (kW) of solar power.
Colorado: 9% home solar system state sales tax exemption.
Connecticut: Connecticut Green Bank Residential Solar Investment Program (RSIP): Applies to purchased solar systems with an upfront cost reduction of $0.426 per installed watt.
Florida: Home Solar System State Sales Tax Exemption: 6% home solar system state sales tax exemption.
Hawaii: Honolulu Solar Property Tax Exemption: Property tax exemption on the added home value from the rooftop panel system.
Illinois: Illinois Solar for All (ILSFA) Low-Income Community Solar Programs: Low-income homeowners can obtain solar panels in this state with a $0 upfront cost.
Massachusetts: Solar Massachusetts Renewable Target (SMART) Program: Compensation per kilowatt-hour produced by a solar power system.

Maryland: Residential Clean Energy Rebate Program (R-CERP): You may qualify for a $1,000 rebate if you purchase and install a new solar power system.
Nevada: NV Energy Residential Energy Storage Incentives: You could save money by adding a new home battery to a solar panel system.
New Hampshire: Residential Renewable Electrical Generation Rebate Program: A cash incentive of up to $1,000.
New Jersey: Solar Investment Property Tax Exemption: A property tax exemption on the total value of your home.
New Mexico: New Solar Market Development Income Tax Credit: A 10% state credit for home solar systems.
New York: NY State Solar Energy System Equipment Tax Credit: 25% tax credit for new home solar systems.
Pennsylvania: Philadelphia Solar Rebate Program: A $200 rebate for every kilowatt (kW) of solar power installed.
Rhode Island: Rhode Island Renewable Energy Fund (REF): Receive funds up to $7,000 for small-scale solar panel systems.
South Carolina: South Carolina Solar Tax Credit: A 25% tax credit for new home solar systems.
Texas: TXU Energy Home Solar Buyback Plan: Bill credits for any excess solar power a solar system creates.
Vermont: Green Mountain Power’s (GMP) Bring Your Own Device (BYOD) Program: Receive up to $10,500 toward a new home battery system.
Wisconsin: Focus on Energy Home Solar Rebate: Obtain a $500 rebate for a solar panel system cost and installation.

Low-interest Solar Financing Loans

Depending on your location, credit score, and other factors, you can receive a discount interest rate on loans to purchase and install a solar power system. Typically, this is 3.99–16.99%.

Net Metering Programs

This is a utility rate program that means your utility company purchases any excess solar energy from your solar panels used to produce electricity for future use.

USDA REAP Grants

These grants are available for homeowners and small businesses that pay up to 50% of the total cost of installing and purchasing a solar panel system. The USDA REAP Grant program is also receiving a boost from the Inflation Reduction Act that was signed until August 2022.

Bonus Depreciation

If you apply this tax incentive, you subtract half of the value of the ITC from the amount you depreciate. Currently, the ITC is at 26%, so you’ll subtract half of this figure from the total cost of your solar panel system.

Can You Combine Solar Incentives with the Federal Tax Credit?

Yes, it is absolutely possible to combine state solar incentives with the federal tax credit. Just ensure that you meet all the requirements for each.

How to Claim the Federal Solar Tax Credit

In order to claim the Federal Solar Tax Credit, you need to file an IRS Form 5695 for your tax year. You’ll then need to calculate the credit amount on Part 1 of this form and enter the final figure on your 1040.

The IRS provides this tax refund as a credit, so you won’t receive money for the amount you’ve spent on your solar panel system. However, you’ll receive savings as credit on your future taxes.

The Impact and History of the Federal Solar Tax Credit

The Federal Solar Tax Credit began in 2005 under the Bush Administration, and it was scheduled to last until the end of 2007. Originally, the Solar Tax Credit provided 30% credit on the total cost of any solar system, but it was capped at $2,000.

In 2020, this amount was reduced to 26%. Thanks to Congress’ popularity of the Solar Tax Credit, it’s been extended until 2023 (for an additional two years), and it’s available to U.S. homeowners in the same form.

The Impact

If the Solar Tax Credit is extended further, more than 95 Gw of solar energy will be installed in the U.S. There are so many other additional factors that show how this tax credit can have a positive impact on the U.S.

For example, solar energy would generate electricity to power 19 million homes. Solar energy would also equate to 3.5% of U.S. electricity, whereas it was 0.1% in 2010. Additionally, solar energy would offset 100 million metric tons of carbon dioxide emissions.

Is Solar Worth it?

A solar PV system is an effective way to source renewable energy, helping to save money on outgoing costs and decrease the impact of sourcing energy on the environment. With incentives, such as the Federal Solar Tax Credit, you can reap the rewards of purchasing and installing a new system if you reside in the U.S.