What Is the Federal Solar Tax Credit
Residential homeowners who install a new solar photovoltaic (PV) system are eligible to receive a federal income tax credit for a percentage of the cost of the PV system. To qualify for this tax credit, the solar system must have been installed during the tax year for which you are claiming the credit - and it must have been used to produce energy for a residential home in the United States.
Tax credit percentages available are:
- Systems installed in 2022 are eligible for a 26% tax credit.
- Systems installed in 2023 will qualify for a 22% tax credit.
Which Costs Are Eligible for the Tax Credit?
As previously stated, homeowners who install PV systems can claim a portion of the cost of the solar energy system on their taxes. But what expenses are eligible? Does this include installation labor costs? What about the costs of energy storage devices connected to the system? Good news! Both labor costs and the costs associated with energy storage devices may be included when calculating the total cost of your system.
According to energy.gov, eligible expenses for the solar tax credit may include:
- PV panels or cells used to power a solar attic fan (but not the fan itself)
- On-site preparation labor
- Permitting fees
- Inspection costs
- Developer fees
- Original installation labor
- Sales tax on eligible costs
View this handout to learn more about the federal solar tax credit.
How Other Incentives Affect the Federal Solar Tax Credit
You may be unaware that other state or utility company incentives that you utilize may impact how many of your expenses you can claim on your federal income taxes. They may also affect how you calculate your taxable income. For example, if you receive a rebate from a utility company for installing a solar system, this rebate, while usually not taxable, must be deducted from the total cost of your system before calculating your solar tax credit. Another example is that if you sell solar renewable energy credits (SRECs) back to your utility company, the money received from that exchange may be considered taxable income.
However, if you are receiving a tax credit or rebate from your state, this should not affect your ability to take full advantage of the federal tax credit. That being said, a state tax credit can affect the amount of taxable income you report on your federal taxes. This is because, with a state rebate, you will have fewer state taxes to deduct.
To fully understand the tax implications of various rebates and incentives, you should speak with a certified tax preparer or an accountant.
How to Take Advantage of the Federal Solar Tax Credit
To qualify for the federal solar tax credit, you must purchase and install a qualifying solar energy system in 2022 or 2023. The year you purchase the system will be the tax year in which you claim the credit. For example, if you purchase and install your PV system in July 2022, you will be able to claim the credit on your 2022 taxes.
Note: the federal solar tax credit is available only for systems purchased outright and not for leased systems.
You do not have to be a homeowner to take advantage of the tax credit. If you are part of a cooperative housing corporation or a member of a condominium, you may still be eligible to receive the tax credit as long as you contributed to the cost of the system. However, if you are a renter and your landlord installed the system, you will not be eligible for the credit.
If you plan to install a solar energy system, make sure you record all your expenses and save the receipts or invoices you receive. You will need an accurate accounting of the costs associated with your system to ensure that you can get the most out of the tax credit.
To claim the solar tax credit, you must complete and attach IRS Form 5695 to your federal tax return. We also recommend that you speak with a professional tax preparer or accountant to make sure you are eligible for the credit and to get help filling out your forms.
Don't Wait: Buy Your Solar Energy System Before 2024
As of right now, it is unclear if the federal government will extend the federal solar tax credit beyond 2023. Therefore, if you want to take advantage of this lucrative incentive, you should plan to install your solar panel system this year or next.
To discuss your options and find out if you are a good candidate for solar, call Valley Heating, Cooling, Electrical and Solar.