The federal, state, and local governments and utility service providers offer incentives to encourage investment in renewable energy installations. By the Energy Policy Act of 2005, the federal government introduced the solar tax credit, also known as the investment tax credit (ITC). Originally, it was offered for a limited period and was set to expire by the end of 2007.
Let us take a deeper look at the federal solar tax credit to make the most of it.
What is the solar investment tax credit?
The federal solar investment tax credit (ITC) is a dollar-for-dollar reduction in the income tax owed. The solar tax credit allows taxpayers to claim a fixed percentage of the expenses incurred in going solar as a tax credit. This applies to both residential and commercial solar installations.
The percentage that can be claimed for the tax credit is decided by the U.S. Congress from time to time. The validity of the scheme has been extended multiple times by Congress, encouraged by its immense popularity and its contribution towards meeting renewable energy goals.
The latest extension to the solar investment tax credit scheme was made in December 2020 for 2 years as part of the COVID 19 relief package. That is until December 31, 2022. It is now available to taxpayers in some form until 2024.
Here are more details.
2016 – 19: 30% of the cost (residential and commercial)
2020 – 22: 26% of the cost (residential and commercial)
2023: 22% (residential and commercial)
2024: 10% (only for commercial)
This is how it works.
When you install solar power for homes, you are rewarded by the federal government with a tax credit equivalent to a fixed percentage of the cost of the system. Currently, this is 26 percent. The tax thus credited can be claimed when you file your federal income tax return for the year. This means the tax credit reduces your federal income taxes owed by the same amount.
A point to note here is that tax credit is not the same as a tax refund. You need to owe taxes to claim this incentive. However, if your tax liability is less than the credit for the year, you can ‘roll over’ the unclaimed credit to the next year provided the tax credit is in effect.
Who can claim the solar investment tax credit?
You are eligible to claim the federal solar tax credit if you satisfy these conditions:
- You installed the solar energy system when the federal tax credit scheme is in force. That is after January 1, 2006.
- The solar installation is in your primary or secondary residence in the United States. In the case of off-site community/shared solar systems, the electricity generated is consumed for your domestic needs. In other words, the power generation does not exceed consumption.
- The solar power system is owned by you and not leased. You do not qualify for the federal tax credit if you are purchasing solar energy generated by a system you do not own.
The solar energy system is new and is being used for the first time. You qualify for the solar tax credit only for the “original installation” of the solar panels. This means the tax credit can be claimed only once for a solar installation.
What expenses are included for the solar tax credit?
When calculating the cost of the solar installations, you are allowed to include the total project cost. This includes expenses incurred on:
- Solar power equipment including solar panels, wiring, mounting equipment, inverter, etc.
- Labor costs for assembly and the original installation. This includes inspection costs, permitting fees, and developer fees.
- Energy storage devices such as a battery used exclusively for solar power generation.
- Sales taxes paid on eligible expenses.
How do I claim the solar tax credit?
Once your solar power installation is in place, you need to provide proof of the same to the federal government to claim the solar tax credit. For this, you need to fill in and submit IRS Form 5695.
If you are filing the income tax return with the help of an accountant, you need to inform the person in advance about the installation.
If you are filing your own return, follow the steps below to claim the Residential Renewable Energy Tax Credit.
- Confirm your eligibility for claiming the tax credit. If you own the solar panels and owe income tax, you most probably qualify for the same. If in doubt, confirm the same with a tax consultant.
- Assemble all receipts of the eligible expenses incurred on the solar installation.
- Complete IRS Form 5695.
- Attach IRS Form 5695 to your federal tax return form (Form 1040 or Form 1040NR).
More information and instructions for filling up IRS Form 5695 are available here.
It is as simple as that.
Here are a few commonly asked questions about solar tax credit answered.
Yes. Owning the home is not a criterion for availing of the tax credit. Rather owning the solar system is. If you are a tenant-stockholder of a co-operative housing corporation or a member of a condominium, you are eligible for the amount contributed towards going solar. However, if you are a tenant and your landlord is installing the solar panels, you do not qualify for the tax credit.
No. You are not eligible. The tax credit is only given for solar panels that are “placed in service” during the year. This means the solar panels are installed and are generating electricity that is used by the homeowner.
Yes, you are eligible for the tax credit for installing solar panels in your primary and secondary homes. However, if the installation is on a rental unit you own, you cannot claim residential tax credit but can claim a commercial tax credit.
The federal solar tax credit can be adjusted only against the income tax owed. The tax credit is not refundable. However, the excess amount can be rolled over to future years and adjusted against the income taxes in the coming years.
The federal solar tax credit can be claimed only against the income tax owed. If you do not owe taxes, you won’t be able to avail the benefit of the tax credit. However, if your taxes are already paid from your paycheck, you can get it adjusted against the tax credit and apply for a tax refund.
The solar tax credit can be claimed against the alternative minimum tax in addition to the federal income taxes.
Irrespective of whether you purchased or financed the solar system, you are eligible for an energy tax credit. You can claim a tax credit based on the full cost of the system. However, the expenses incurred on origination fees, interest on financing, and extended warranty cannot be included in the system cost when calculating the tax credit.
Solar energy installation in the United States is eligible for incentives from various sources such as federal and state governments and utility service providers. Generally, a homeowner can claim these benefits simultaneously. However, the income tax and tax credit may be affected when claiming other incentives.
For example, utilities offer subsidies for solar installations. The subsidy amount is excluded from income tax. This means this amount needs to be reduced from the system cost when computing tax credit.
The federal solar tax credit and state tax credit can be claimed for the same solar installation. However, claiming state tax credit will increase the taxable income for federal taxes as you pay less state income tax. This means the amount of state tax credit will be taxed at the federal tax level.
Yes, the solar tax credit is a one-time credit for a new solar installation. However, if the income tax owed is less than the tax credit, the remaining amount can be rolled over to future years.
Right now, the solar tax credit amounts to 26 percent of the cost of solar installation. This includes many of the associated equipment and installation fees. With the average price tag of installing solar panels being $20,000, the tax credit would amount to $5,200. If you owe income tax, the tax credit will be adjusted against it. And, if the tax owed is less than the tax credit, the excess can be carried forward to future years. This is substantial savings.
So, yes, the solar tax credit is a valuable benefit.