Federal Solar Investment Tax Credit (2023)
Eligibility criteria, credit amounts, and how to claim the credit on your taxes.
Disclaimer: This article provides insight into Federal Solar Investment Tax Credit. It is not to be used as a legal or tax advice resource. This is important because this discussion is limited in scope and does not address any other factors that U.S citizens may need to consider when making decisions related to U.S taxes.
The Federal tax implications of transactions or matters referred on this page may change over time.
- The Federal Solar Investment Tax Credit is a government-backed program that provides tax credits to offset solar installation costs.
- It was established through the Energy Policy Act of 2005
- To be eligible for the federal solar tax credit, you must install a solar energy system or have a share in a community-owned solar project.
- The IRS Form 5695 must be filed alongside Form 1040 to claim the solar tax credit.
- The Inflation Reduction Act increased the rate from 22% to 30%, extended the deadline from 2022 to 2034, and added energy storage devices as eligible expenses on Form 5695.
What is the Federal Solar Investment Tax Credit?
The Federal Solar Tax Investment Tax Credit (ITC) is a government-backed program that offsets the cost of solar installations.
- It does not come in the form of real cash. Instead, it offers a tax credit, which you can use to pay owed taxes.
- It offers different discounts based on when you installed the solar system.
Note: The federal solar investment tax credit is a one-time offer, unlike other solar incentives.
The solar investment tax credit came into existence via the Energy Policy Act of 2005. Over the years, this tax credit has gone through many reforms and regulations.
As of 2023, it is referred to as the Residential Clean Energy Credit. It was established to boost the solar industry, reduce the cost of adopting clean energy, and increase the pace of innovations in the industry.
How Does it Work?
The federal solar tax credits reduce your tax liability when you install a solar system. However, the deduction rate depends on when you installed the system.
Furthermore, to receive the credit, you must file a tax Form 5695 alongside the Form 1040. The Form 5695 is where you input all expenses incurred during the solar installation project.
Eligible persons can roll the solar tax credit into the next year. This is common when the tax credit is greater than the tax liability for the year.
How it works
Jenny installed a solar system in 2023, spending a total of $30,000. Since it was installed in 2023, she's eligible to receive a 30% discount in the form of tax credits. In other words, she can claim $10,000 as tax credit when she files her annual tax return.
How Do I qualify for Federal Solar Tax Credit
You can qualify for the federal solar tax credit under these conditions:
- The system was installed between 2017 and 2034.
- The system was installed on a property that's located within the US.
- The system was installed for the first time.
- The user either completely owns the system or has a share in a community-owned solar project.
What Costs Are Covered by the Federal Solar Tax Credit?
The federal solar tax credit will only cover the following expenses:
PV cells and panels, including those used for heating and powering attic fans.
Labor cost for these activities; onsite preparation, design of solar system, and inspect. It'll also cover costs of getting permits and other fees.
Energy storage devices with a capacity above 3kWh. However, this only applies to batteries installed after December, 2021.
When and for how long can I Claim the Solar Tax Credit?
You can claim a solar tax credit immediately after installing the PV system. You're eligible for the credit if you installed the system while the program was still in effect (from 2017 to 2034). However, you can only claim it once.
How Can I Claim a Federal Solar Tax Credit
To claim a solar tax credit, you must follow these general steps:
Step 1: Ensure you're eligible to receive the incentive.
Step 2: Download the IRS Form 5695.
Step 3: Input the eligible expenses incurred during solar installation on line 1 of the form. In addition, you can also claim tax credits for other renewable energy sources by filling out lines 2 and 5 on the form.
Step 4: Determine your tax liability and fill out Form 1040 accordingly.
Step 5: deduct the solar tax credit from the tax liability. If the credit is more than the liability, transfer the remaining to the next tax year.
What States Offer a Solar Tax Credit for Solar Panels?
The solar tax credit is available in all states in the US. In addition to the tax credit, each state features a different set of solar incentives. Here are examples of states with local solar incentives:
Arizona solar users can access a residential solar tax credit. It covers 25% of the cost of a solar installation. It has a maximum limit of $1,000.
California offers the following solar benefits:
- Self-Generation Incentive Program (SGIP)
- Single-Family Affordable Solar Housing (SASH) Program
- Solar Energy System Property Tax Exclusion
Local utility companies also offer bonuses to renewable energy users.
The New York solar tax credit is a state-sponsored program that covers 25 percent of the cost of solar installation. It has a $5,000 maximum limit. Solar users are also eligible for a 4% sales tax exemption on solar equipment.
Learn More About Your State's Solar Tax Credit and Other Incentives
How did the Inflation Reduction Act Affect the Solar Investment Tax Credit in 2022?
President Joe Biden signed the Inflation Reduction Act into law on August 16, 2022. Since it became law, it has affected the solar investment tax credit in the following ways:
The IRA increased the discount rate from 22% to 30%. It also extended the deadline from 2022 to 2034.
It added energy storage devices to the list of eligible expenses. However, this only applies to devices with a storage capacity greater than 3 kWh.
Timeline for the Solar Credit
Since its launch, the solar tax credit has evolved across different phases with policy revisions:
Federal Solar Tax Credit (2005)
Former President George W. Bush signed the Energy Policy Act on August 8, 2005. The law acted as a stimulant to boost clean energy initiatives and also reduce the cost of adopting them.
Under this law, hybrid car owners were eligible to receive $3,500 in benefits. Most importantly, the law contained the "Residential 25D” Investment Tax Credit.
It provided a tax credit that covered 30% of expenses on solar installations. However, there was a caveat to the incentive:
- It had a one-year lifespan
- Beneficiaries could not claim more than $2,000 as a tax credit.
Note: The Senate would later extend it for another year.
Federal Solar Tax Credit (2008)
The 2008 Emergency Economic Stabilization Act revived the solar tax credit. Furthermore, it extended the program for the next eight years.
The Act also removed the $2,000 limit on tax credits. The tax credit rate was designed to gradually decrease for the next eight years.
Federal Solar Tax Credit (2009)
A year later, former President Obama signed the American Recovery and Reinvestment Act (Recovery Act). The Act injected over $90 million into clean energy investments, including the solar tax credit. For instance, the act introduced the Solar 1603 program which enabled solar users to receive cash payments instead of tax credits
Federal Solar Tax Credit (2015)
In December 2015, the Senate and House of Representatives passed a spending package. This legislation extended the deadline for the solar investment tax credit until 2020/2021.
In addition, it increased the rate back to 30 percent and projected to reduce the rate to 22 percent by the end of 2021.
Federal Solar Tax Credit (2022)
Signed into law by President Biden, the Inflation Reduction Act gave new life into the program. It increased the rates back to 30 percent and extended the deadline to December 31, 2034.
Under the Inflation Reduction Act, you'll receive a 30 percent tax credit for PV systems installed between 2022 and 2032. However, you'll only receive 26 percent for systems installed in 2033. The rate will further fall to 22 percent in 2034.
What is the Income Limit for the Solar Investment Tax Credit?
There is no income limit on the solar investment tax credit. However, you may need to rollover part of the credit if it exceeds your tax liability for the year. The IRS enables beneficiaries to rollover unused credit for the next five years.
What are the Residential Solar Tax Credit Amounts?
The Residential Solar Tax Credit is equivalent to 30 percent of the cost of solar installed between 2022 and 2032. However, it is worth 26 percent and 22 percent of solar installed in 2033 and 2034, respectively. There are no solar tax credits for PV systems installed in 2035.
How does the Solar Tax Credit Work if I Don't Owe Taxes?
The solar tax credit only works for those who have tax liabilities. If you don't owe tax, you can continue to rollover the tax credit until you do. You may consult a tax professional to learn more about this situation.
What are the requirements for filing for a solar panel tax credit?
To receive the solar tax credit, you must file Form 5695 alongside your 1040. Furthermore, you must list out all eligible expenses on Part 1 of the form. In addition, indicate the tax credit on the form 1040. The IRS allows solar users to rollover unused tax credits to the next tax year.
Frequently Asked Questions about Solar Credit and Home Installations
Can I Combine the Solar Panel Credit with Other Incentives?
Yes. There's no restriction on claiming the tax credit in addition to other incentives. Since solar installations have a high upfront cost, it is a good strategy to use more than one solar incentive.
Can I Claim the Solar Panel Credit if I am not a Homeowner?
No, the solar tax credit is not restricted to only homeowners. Stockholders in a cooperative housing corporation can also claim this benefit. Furthermore, you can claim the credit even if the PV system is not installed on your primary residence
Can I Claim the Solar Panel Credit if I am not Connected to the Grid?
You can claim solar tax credits even if you're not connected to the grid. However, your solar system must generate energy for you to claim the benefit. You must connect to the grid to access net metering programs and other local solar incentives.
Can I Claim the Solar Panel Credit if the Panels Are on my Property but not on my Roof?
Yes. The solar tax credit is accessible for both roof-mounted and ground-mounted solar installations. You are eligible for the solar tax credit as long as you own or are a shareholder in a solar system. There's no restriction on where you can install the system.
Can I Claim the Solar Panel Credit if I install Tesla Solar Panels or a Tesla Solar Roof?
Yes. Tesla solar roof and panels are designed to qualify for the federal solar tax credit. In addition to this, the Tesla Powerwall is also eligible for the tax credit.
Can I Claim the Solar Panel Credit if I Financed my Solar Energy System Instead of Paying it Upfront?
Yes. You can receive the solar panel credit even if you financed the solar system. That said, you claim the solar panel credit for the full cost of the system. Keep in mind that the tax credit does not cover origination fees, interest owed, or other miscellaneous expenses.
What was the Solar Tax Credit for 2015?
Solar users were eligible to receive a 30 percent solar tax credit in 2015. The tax credit only covered expenses on eligible renewable energy equipment.
What was the Solar Tax Credit for 2021?
The solar tax credit was 26 percent for solar and eligible renewable energy systems installed in 2021. However, the rate was later increased to 30 percent in 2022.
What was the Solar Tax Credit for 2022?
Solar users were eligible to receive a 30 percent solar tax credit in 2022. However, the rate was 26 percent before the Inflation Reduction Act became law in August of the same year.
This credit is available to homeowners who purchase and install a solar panel system on their primary residence, and it can be claimed on their federal tax return.
What is the Solar Tax Credit for 2023?
Solar users will receive a 30 percent solar tax credit for solar systems installed in 2023. This will cover 30 percent of the installed solar equipment.
This credit is available to homeowners who purchase and install a solar panel system on their primary residence, and it can be claimed on their federal tax return.
What is the Solar Tax Credit for 2024?
The solar tax credit for 2024 is 30 percent. It will cover all expenses incurred by solar installations.
This credit is available to homeowners who purchase and install a solar panel system on their primary residence, and it can be claimed on their federal tax return.
What is the Solar Tax Credit for 2025?
The solar tax credit is set at 30 percent for eligible solar equipment. This will cover 30 percent of the installed solar equipment. This credit is available to homeowners who purchase and install a solar panel system on their primary residence, and it can be claimed on their federal tax return.
