Solar panel tax credits are tax incentives by the government (both state and federal) to reduce the total cost of solar and promote the installation of renewable energy sources.
Solar panel tax credits reduce your total tax liability (income taxes owed). Solar tax credits can be state or federal, and taxpayers qualify by installing a solar panel system in a given tax year.
While you can claim both federal and state solar credits for a single solar project, you can only claim them once. However, if your energy tax credit is greater than your liability, it can be carried over to the next tax year.
For instance, if you earn a solar tax credit of $7,000 for installing solar, but your annual tax liability is $6,000, you'll get a $1,000 tax reduction the following year.
What's The Difference Between Solar Tax Credits, Incentives, And Rebates?
Tax credits, incentives, and rebates help reduce the cost of a solar system, but they all work differently depending on the provider and eligibility terms.
- Tax credits: As the name implies, tax credit impacts your tax liability. You earn them from federal and state governments and must be a taxpayer. They include:
- Federal Investment Tax Credit (ICT): This is a tax reduction of your federal income tax owed equal to 30% of the total cost of your solar system cost. It's from the federal government and is available for qualifying businesses and homeowners who purchase a solar system.
- State tax credits: State tax credits are from state governments and reduce your state income tax liability. While they're available in most states, the details vary from state to state.
- Incentives: These are programs from state and local governments and municipalities aimed at reducing the cost of your solar project. They can be in the form of tax credits, low-interest loans, or solar energy credits. Examples include property tax exemption, net metering, and performance-based incentives.
- Rebates: Solar rebates are one-time payments for installing a solar system, usually through a solar company, state or federal governments, utility company, or solar panel manufacturer.
What Is The 2023 Federal Solar Tax Credit?
The federal solar tax credit or the solar investment tax credit (ITC) reduces your federal income tax liability (taxes owed) when you install a solar system. The 2023 ITC is an extension of the former solar credit to reduce the overall cost of solar systems and encourage commercial and residential clean energy use.
What is it?
The 2023 federal solar credit was established in 2022 after the signing of the inflation reduction act into law to extend and change the terms of the previous ITC. The tax credit is equal to 30% of the total cost of your solar installation between 2022 and 2032. For instance, if your total solar purchasing and installation cost is $30,000, you'll get a $9,000 tax credit, which will reduce your federal income taxes owed by $9,000 for that tax year.
The credit is applied to your federal tax return for the tax year the system was installed. If your credit exceeds your liability, the excess will be applied to the following year’s tax bill. Excess credit will not be returned as a tax refund.
The tax credit will drop to 26% in 2033 and 22% in 2034, after which it will expire unless extended.
Is the federal tax credit the same as a tax deduction?
Tax credits and tax deductions are two different things:
Tax credits reduce your income tax liability (income taxes owed).
Tax deductions reduce your total taxable income before taxes owed are calculated.
Who is eligible?
Taxpaying homeowners and businesses are eligible for the ITC. However, you must meet the following terms to claim the tax credit:
- You must be a taxpayer. Nonprofits are not eligible for the tax credit; however, the Inflation Reduction Act made nonprofits eligible for a direct payment option of 30% of the cost of their solar system.
- You must own the solar system. Homeowners on a solar lease or PPA (power purchase agreement) do not qualify.
- The system must be in the United States.
- The solar system must be new.
What types of solar energy systems are eligible?
The two types of solar systems eligible for federal tax credits are:
- Photovoltaic (PV) system, which uses solar panels to generate solar energy.
- Concentrating Solar-Thermal Power (CSP) systems that use mirrors and receivers to collect and store solar energy. These are usually used in larger power plants.
How to factor the total upfront costs of a solar panel installation
To factor in the total upfront costs of your solar project, you'll include all the expenses incurred during the installation process. They are:
- The cost of solar panels, including PV panels and solar cells. The cost of solar technology enhancements, such as SolarSkins, is not included.
- Cost of equipment to run the PV system, such as wiring, inverter, and mounting hardware.
- Cost of energy storage devices, including batteries. Any battery storage system capacity must have a rating of 3 kilowatt-hours and above to be counted into the cost of the system.
- Labor costs, including installation, permits, and inspections.
- Sales taxes incurred on eligible expenses. However, some states exempt such expenses on solar equipment.
Adding these expenses will give you the total cost of your system and help you determine the amount you’ll save from the tax credits.
How To Find State Tax Credits
The DSIRE database of state incentives is the best place to start for finding state and local incentives. You'll use your zip code to get all the state-related solar credits, solar incentives, and rebates within your region.
State tax credits work the same as ITC. Therefore, if you earn a state solar credit, you get a reduction in your state income taxes. But the credit amounts vary from one state to another.
For instance, Arizona has a 25% tax credit for the cost of solar, up to $1,000. New York's 25% Solar Equipment Tax Credit will earn you up to $5,000.
How To Claim State & Federal Tax Credits For Solar Panels
To claim the federal and state tax credits, you must meet all the requirements. Also, you'll need receipts for all of the expenses of installing your solar PV system. These will need to be submitted when you file for your credit.
Once you're sure you qualify, you'll complete the IRS form 5695 and ensure you follow all of the instructions. Your total tax credit will be calculated in Part 1 of the form.
Then you’ll attach it to your federal tax form 1040 or 1040NR.
If you have an accountant who files your taxes, let them know you have solar so they can submit the IRS form with your tax files.
You can consult with a tax professional to better understand how the tax credit works.
How Much Money Will Tax Credits Save You On Solar Panels?
Tax credits can substantially reduce the cost of installing solar. The federal investment tax credit is equal to 30% of the total cost of your solar project. Therefore, assuming the total cost of the system is $20,000, you'll get a $6,000 federal tax credit.
If you include other tax credits, rebates, and incentives, you may cut the costs of solar power by over 50%.
