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Oct 07, 2024 | 6 min read
Understanding Solar Incentives: A Guide to Tax Credits
What is a Tax Credit?
A tax credit directly reduces the amount of income tax you owe. For instance, if you qualify for a $1,000 federal tax credit, your tax bill decreases by that exact amount. While this is often referred to as the Investment Tax Credit (ITC), it differs from the ITC available to businesses that install solar systems.
What is the Federal Solar Tax Credit?
The federal residential solar energy credit allows homeowners to claim a percentage of their solar PV system costs as a tax credit on their federal income taxes. Although other renewable energy sources may qualify for similar credits, this guide focuses specifically on solar.
To qualify, the installation must be completed within the tax year in question.
For systems installed in 2020 and 2021, the credit was set at 26%.
Starting in 2022, Congress extended this credit to 30% for installations through 2032. Systems installed before the end of 2019 also qualify for this rate.
From 2033, the credit will drop to 26% and then to 22% for systems installed in 2034. After 2034, the credit will expire unless renewed by Congress.
There’s no cap on the amount you can claim!
Am I Eligible for the Federal Solar Tax Credit?
You may qualify for the federal solar tax credit if you meet the following conditions:
Installation Date: Your solar PV system was installed between January 1, 2017, and December 31, 2034.
Location: The system is installed at your primary residence in the United States.
Ownership:
- You own the system outright (purchased with cash or financed).
- Alternatively, you can purchase an interest in a community solar project, provided the generated electricity offsets your home’s consumption. Note: Merely buying electricity from a community solar project does not qualify.
System Status: The system must be new or used for the first time, as the credit only applies to the original installation.
What Expenses are Covered?
The following costs can be included when calculating your credit:
Solar PV Panels or Cells: This includes panels used to power attic fans (not the fans themselves).
Labor Costs: Expenses for contractor work related to installation, such as permitting and inspection fees.
Balance-of-System Equipment: This encompasses wiring, inverters, and mounting gear.
Energy Storage Devices: For systems installed after December 31, 2022, devices with a capacity of 3 kWh or greater are eligible. If installed in a later tax year, they still qualify but must meet installation date requirements.
Sales Taxes: Applicable sales taxes on eligible expenses.
How Do Other Incentives Affect the Federal Tax Credit?
For more detailed information on various incentives, check the Database of State Incentives for Renewables and Efficiency.
Utility Rebates
In most cases, utility rebates for installing a solar PV system are exempt from federal income taxes. This means any rebate you receive will be deducted from your total installation cost before calculating your tax credit. For example, if your solar system cost $18,000 and you received a $1,000 rebate, your tax credit would be calculated as follows:
($18,000 − $1,000) × 0.30 = $5,100
However, payments for excess electricity delivered to the grid (like net metering credits) do not affect your eligibility or credit amount.
Renewable Energy Certificates
If you receive cash or incentives for renewable energy certificates, this payment may be considered taxable income. While it may increase your gross income, it won’t reduce your federal solar tax credit.
State Government Rebates
State rebates typically do not reduce your federal tax credit. For example, if your solar installation cost was $18,000 and you received a $1,000 state rebate, your federal tax credit would still be calculated as:
$18,000 × 0.30 = $5,400
State Tax Credits
State tax credits for solar installations generally do not impact your federal tax credits. However, they could increase your taxable income since they reduce the state income tax deduction on your federal taxes. Given the $10,000 limit on state and local tax (SALT) deductions imposed by the Tax Cuts and Jobs Act of 2017, the net benefit of state tax credits may be less than expected for some taxpayers.
Conclusion
Understanding solar tax credits can help maximize your savings when investing in solar energy. Be sure to stay informed about both federal and state incentives to make the most of your solar installation!
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