If you're considering installing a solar energy system for your home, you may be eligible for solar panels tax credit that can help offset the cost. However, navigating the process of claiming solar panel tax credit can be confusing, with different rules and requirements depending on your location and the specifics of your system. In this article, we'll walk you through all you need to know about solar panels tax credit, including what is the tax credit for solar panels? How does it work? What does it cover and how it is affected by other solar panel incentives?
What is Solar Panel Tax Credit?
The solar panel tax credits are incentive programs that allow homeowners and businesses who invest in solar panel systems to deduct a portion of the installation cost from their taxes.
The solar panels tax credits can be a great boon for homeowners and businesses as they can significantly reduce the cost of solar panel installation by up to 30% of the total cost, making it more affordable and accessible to invest in solar energy. By reducing the cost of solar panel installation, the tax credit can also increase the return on the investment for solar panels and make it faster to recoup the initial investment in solar panels.
What is Federal Tax Credit for Solar Panels?
The federal tax credit for solar panels is officially known as the Investment Tax Credit (ITC). It is an incentive program provided by the federal government to encourage the installation of solar energy systems, including solar panels, on residential and commercial properties. Here we’ll talk about how it works, its types and coverage.
How does it Work?
The solar panel federal tax credit provides a tax reduction to individuals or businesses that install solar energy systems, including solar panels, on their property. Solar system owners can use this tax credit to offset federal income taxes owed, up to the full amount of the credit. After people install a solar panel system on their property and pay for the cost of the equipment and installation, they can claim the tax credit on their federal income tax return for the year in which the system was installed. What’s more, If the solar panel tax credit amount is larger than the income tax owed, the remaining credit can usually be carried over to the next tax year.
Currently, the credit amount is 30% of the total cost of the solar energy system, which means a 30% deduction of the installation cost from federal taxes. This means that if the total cost of installing your solar panel system is $21,000, the program could cover your income tax for up to $6,300 of that cost (30% of $21,000). This 30% credit amount was passed by Congress in 2022 and will be lasted to 2032. After 2033, the tax credit amount will be reduced to 26%.
What Are the Different Types of Solar Panel Tax Credits Available?
In the United States, there are two main types of federal tax credits available for solar panels:
- Residential Solar Tax Credit: This credit applies to solar panels installed on the taxpayer's primary residence.
- Commercial Solar Tax Credit: This credit is available for solar panels installed on commercial properties, including businesses, non-profits, and government entities.
Both the Residential Solar Tax Credit and the Commercial Solar Tax Credit provide the same amount of tax credit for the cost of installing solar panels.
What Cost Does The Federal Solar Panel Tax Credit Cover?
The tax credits for solar panels only apply to the cost of solar panel installation itself. The following expenses are included in the tax credit:
- Solar photovoltaic (PV) panels
- labor costs for onsite preparation and installation
- Permitting fees, inspection costs, and developer fees.
- Energy storage devices
- Other equipment needed (mounting equipment, inverters, wiring)
Please note that the tax credits for solar panels are not applicable to ongoing maintenance expenses.
How to Claim Solar Panel Tax Credit?
After discussing what is solar panel tax credits, the next important question is how to claim tax credits for solar panels. To claim the federal tax credit for solar panels, you need to follow some steps:
- Check Your Eligibility: To be qualified for the tax credit for solar panels, you need to have your primary or secondary residence in the U.S. and own a new solar energy system yourself. That means the solar panel should be new for its original installation, and it should be purchased and owned by yourself instead of being rented from a solar panel system company. Lease solar panels cannot be applied to tax credit.
- Gather Your Document: After confirming your eligibility, gather all documentation related to the cost and installation of your solar panel system, including invoices, receipts, and other proof of payment.
- Calculate Your Credit Amount: Multiply the total cost of your solar panel system by the applicable percentage based on the year in which your system was installed to know the amount of your tax credit.
- Claim the Credit: Complete IRS Form 5695, Residential Energy Credits, and include it with your federal income tax return. Enter the amount of your tax credit on the appropriate line of your tax return.
- File Your Return: File your tax return electronically or by mail by the tax filing deadline. If you file for an extension, you must still pay any taxes owed by the original deadline to avoid penalties and interest.
Other Incentives and Their Effects on Federal Tax Credit
In addition to the solar panel tax credit offered by the federal government, there are other incentive programs available for solar panel installation. Two major incentives are tax credits offered by the state or city and electricity utility. You can claim the tax credit if you receive other clean energy incentives for the same project, but they may have different effects on your original tax credit.
- State and Local Incentives: Many states and local governments offer additional solar panel tax credits, rebates, or other incentives for solar panel installation. These incentives can be used in addition to the federal tax credits for solar panel and reduce the overall cost of your solar panel system, making solar panel installation more affordable and increasing the overall return on investment.
- Rebate from Electricity Utility: In many cases, your electrical utility provides subsidies for you to install a solar panel system and that amount of fee will be excluded from income taxes through an exemption in federal law. For example, if you spent $2,1000 in 2023 and your electrical utility provide you a rebate of $1,000, your tax rebate would be: ($21,000 - $1,000) * 30% = $6000.
Are solar panels tax-deductible? The answer is yes. Currently, the credit amount is 30%, this credit amount will last until 2032. After 2032, the tax credit amount will be reduced to 26% for 2033 and 22% for 2034. It is estimated that the federal tax credit will expire in 2035 and no tax credit will be provided at the federal level if new incentives won't come up. So, now would be a great time for you to invest in solar panels with probably the smallest costs.