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Everything You Need to Know About the Federal Solar Tax Credit

April 8, 2022

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The federal solar tax credit can make solar panels affordable for your property. However, the downside to these credits is that they aren’t permanent! In turn, it’s vital that a homeowner take advantage of these incentives and schedule a solar consultation and installation quickly.

Before you put off a solar panel installation for another year, check out some vital information about tax credits for solar panels. As always, be sure to discuss this information with your accountant or financial adviser when filing your taxes and hold onto all receipts and invoices related to the project. If you do, you’ll then enjoy maximum savings and many other benefits from your new solar panel system. Learn more about solar incentives with our team at Alliance Solar.

How Solar Panel Tax Credits Work

Solar tax incentives vary by year and are reduced over time! Consequently, it might be easier for you to understand those credits if they’re explained by year. Again, be sure to check with your accountant or on any requirements or changes before filing your taxes. This will ensure you file accurately and take advantage of all the credits for which you’re eligible!

A couple learning about solar tax credits.

What is a tax credit?

First, note that a tax credit refers to a dollar-for-dollar reduction on taxes you owe. Second, this information is for federal and not state taxes! Not all states offer tax credits, while some provide excellent financial incentives for going solar.

The federal solar tax credit, often called the investment tax credit or ITC, allows you to deduct a certain percent of solar installation costs. Note, however, that the system must be installed during that credit year. Also, the ITC only offers a percentage of those costs! Don’t assume you can deduct all your solar installation costs on your tax returns at the end of the year.

Also, consider that congress can extend solar tax credits at any time! As a matter of fact, congress extended those credits in December 2020. Consequently, homeowners can take advantage of those deductions through 2023, as of this writing.

How much is the solar tax credit for 2022?

The ITC provides a 26% credit for systems installed from 2020 through 2022. Note, there is no maximum amount homeowners might claim for this credit. Also, this is the federal tax credit, as said; state credits, if any, will vary.

How much is the solar tax credit for 2023?

The solar tax credit allows you to deduct 22% of your costs for solar systems installed in 2023. However, this incentive ends after 2023! In other words, there are no current deductions in place for systems installed in 2024.

Also, note that the original ITC allowed for a 30% deduction for systems installed before 2020. Homeowners who put off a solar installation are only going to lose money because of these reduced deduction percentages.

Qualifying for Federal Solar Tax Credits

Your accountant is the best source of information when it comes to qualifying for solar tax credits. You also can schedule a virtual solar consultation with our team to determine if solar is right for your home. However, consider some general details about these credits and how they’re applied for homeowners:

  • You must have installed the solar system between January 1, 2006, and December 31, 2023.
  • The solar panel array must be on your primary or secondary residence in the United States.
  • You must own the solar array system or are financing to own. In other words, the credit doesn’t apply to leased solar panel systems.
  • The ITC only applies to new panels or first-time use systems. Consequently, you can’t apply the credit to secondhand or used panels!

What Expenses Are Included in the Solar Tax Credits?

Your solar panel purchase price is not the only expense included in your potential tax credit! Also included are labor costs for any preparation and the installation itself. Additionally, the credit also includes costs for permits, inspections, and developers.

Also, the ITC includes needed wiring, inverters, roof rack or mounting equipment and other such items. You can also deduct energy storage devices or batteries, as well as your sales taxes. In other words, save your receipts for all expenses related to solar panel installation for that residential energy credit! Your accountant can note which are deductible through the ITC tax credit.

saving money with federal solar tax credit

Can I Claim the Solar Tax Credit Twice?

Unfortunately, a homeowner cannot claim the solar tax credit twice. Specifically, whatever credits you claim for one year’s tax returns are not deductible for another year. However, you can claim any upgrades or improvements to your system. For example, if you invest in a new inverter or power storage equipment, those costs are typically deductible.

Also, note that you can also claim any unused tax credits for solar panels the following year. Your tax accountant can review your receipts and paperwork and note any unused credits. In turn, he or she can then advise on how to deduct them for the next year’s taxes.

The 30 Percent Federal Solar Tax Credit is No More

From 2016 through 2019, federal solar tax credits allowed homeowners to deduct 30% of their solar installation costs. Subsequently, congress reduced the federal solar tax credit to 26% for 2020 through 2022, and then to 22% for 2023. Currently, there is no deduction for 2024 installations, although this can change at any time!

Therefore, homeowners are no longer able to take advantage of the 30% solar tax credit. However, there are still deductions available for systems installed before December 31, 2023.

Also, note that manufacturer rebates, state tax credits, and other financial incentives also change over time. In turn, it’s vital that homeowners invest in solar quickly, to take full advantage of all those financial incentives!

Can You Get a State Tax Credit for Solar Power?

State tax credits for solar power vary by state and can also change from year to year. For example, many states waive sales tax for solar panels. In a state with a 7% sales tax, that means saving $70 for every $1000 you spend on solar panels.

Also, some states offer a property tax exemption for solar installation. In other words, if your home’s value increases after solar installation, you’re not taxed for that increased amount. This can also save you hundreds and even thousands you would otherwise pay for your solar panel installation.

Additionally, research state incentives and rebates for your solar purchase! Some states have offered a 10% to 20% one-time rebate for solar panel purchase and installation costs. Again, these amounts have changed, and some states have even eliminated them over the years.

new solar panels for home with federal solar tax credit 2022

Net Metering vs. the Solar Tax Credit

Many utility companies offer credit for solar power produced by homeowners through net metering. However, this is not a tax credit or rebate, although it can mean lowered or eliminated power bills. Consider how net metering works and how it saves you money year-round.

First, your solar array connects to your home’s wiring, which would still receive power from a local utility company. Second, your power meter continues to record your electricity consumption, tallying up that cost every month.

Next, solar power produced by your home’s panels goes back to the power company through those wires. In turn, your power meter runs backward or otherwise credits your property for that energy production.

Net metering then refers to the difference between these two amounts, which is reflected on your monthly bill. To illustrate this process, suppose your home uses $100 worth of power but produces $80 worth of solar energy. Consequently, you would receive a bill for $20, or the difference between those amounts.

While net metering doesn’t offer a large solar financial incentive at once, it does mean affordable power over the years! Also, using net metering means not having to invest in energy storage or solar batteries. In turn, you can spend less on your solar installation and enjoy affordable electricity for years to come.

What Are the Financial Benefits of Going Solar?

Tax credits make solar more affordable but they’re not the only advantage to consider! Check out some added financial benefits of going solar on your property:

  • Lower energy costs are an excellent reason to consider a solar panel installation! Many homeowners save around $2000 for every 20 years of solar panel use. In turn, you can use that money to pay other bills, invest, or otherwise spend as you please.
  • Additionally, note that investing in solar allows you to upgrade appliances and electronics without worrying about increased electric bills. Also, you are less affected by rate hikes from your local utility company when you choose solar panels.
  • In addition, note that a home typically increases in value after a solar panel installation. You can then build equity faster or sell for more money if you should put your home on the market! Also, an improved financial portfolio can mean lower loan interest rates for loans and credit cards.
  • In some areas, you can earn money by selling excess solar power to your utility company.
  • Solar panels degrade and lose their efficiency over time. In turn, many homeowners decide to replace them after 20 or 30 years. You can then resell your panels or donate them to a charity and receive a tax deduction where applicable!

Are Solar Panels Worth the Investment?

Solar panels offer more than just financial advantages for homeowners, and there are many reasons to consider a solar installation! For instance, solar panel installation and recycling are both very labor intensive. In turn, you’re creating local jobs and stimulating your area economy when you go solar.

Also, consider the environmental impact of choosing solar panels. While electricity itself offers clean energy without pollutants, power plants produce tons of emissions! These include mercury, acidic gases, and many toxic metals. Consequently, switching to solar means reducing the pollutants for which you’re responsible.

Lastly, note that investing in solar can mean encouraging your neighbors to do the same. One home on the block with solar panels can quickly lead to several more homes investing in solar panels. In turn, your neighborhood will reduce pollutants and create local jobs at the same time.

solar panels bought with residential energy credit

Answering Your FAQs About Claiming the Federal Solar Tax Credit

Check out some other frequently asked questions about claiming the federal solar tax credit through 2023. As always, check with your accountant or financial adviser before filing, to ensure your return is accurate.

Can I claim the federal solar tax credit if I’m not a homeowner?

The federal solar tax credit applies to those with a financial stake in a cooperative or condominium. If you contribute the cost of solar panel installation for these residences, you can typically still claim that credit.

Can I claim the federal solar tax credit for panels on my property but not the roof?

Ground panels are an excellent choice for properties with small or sloped roofs. Also, adding ground panels affords you more solar power production no matter a property’s roof size! Additionally, you can claim the federal solar tax credit for panels installed on the ground, not just a home’s roof.

Does the federal solar tax credit apply for panels installed on a vacation home?

The short answer is yes, you can claim the federal tax credit for panels installed on a vacation home. However, note that this credit is for residential properties and not businesses. So, if you rent out your vacation home, check with an accountant before filing your taxes. He or she can advise if you might claim a deduction on a business tax filing instead.

Can I claim the federal tax credit if I take advantage of rebates and other deals?

First, you can claim a federal credit even if you take advantage of rebates and other such deals. However, note that the federal tax credit applies to your total purchase and installation cost. As an example, suppose a rebate has lowered your solar panel cost from $10,000 to $9500. Consequently, you would claim the appropriate tax credit on the $9500 you spent.

Alliance Solar is happy to provide this information about federal solar tax credits to our readers. Hopefully you found it helpful! As of this writing, congress has not yet extended those credits through 2024. In turn, it’s vital that you call now about a solar installation! Our solar panel installation contractors can design an array to fit your needs and budget. Above all, we’re happy to explain how solar works and can benefit you financially. To get your property started with a FREE consultation, call us right now.

 

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