A Homeowner's Guide To Solar Tax Credits

March 30, 2023

Solar power is becoming increasingly sought-after as more people strive to reduce their carbon footprints. Besides its environmental benefits, shifting to solar power rewards individuals with tax benefits. For instance, the federal solar tax credit, or Investment Tax Credit (ITC), offers an incentive that entices more homeowners into contributing to the national grid while saving on their tax expenditures. To qualify for this federal incentive, you must meet the set criteria, including the primary step of owning a solar panel. This guide offers insight into solar tax credits.

What Is The Solar Tax Credit?

The federal solar tax credit is an incentive by the government to encourage more homeowners to make energy-efficient upgrades. They help American homeowners save money on taxes through credits claimed on federal income tax returns. The program rolled out in 2005 and has continually slashed up to 30% from the overall cost of every home solar-energy system.

Each state in North America has various solar tax credit incentives to encourage homeowners to reduce their carbon footprints. However, these incentives only add to the federal government’s ITC. Generally, though, these incentives have helped thousands of homes turn free sunlight into affordable energy, contributing to the global cause of creating sustainable green energy sources. South Carolina has been the standout state with excellent tax credit incentives. Washington residential solar incentives, among numerous others, are coming closer too.

Who Is Eligible For The Solar Tax Credit?

While every United States homeowner can qualify for ITC incentives, you must meet the set criteria. Usually, all homeowners need to own at least one solar panel to qualify. However, there's more you need to measure up to if you were to qualify for this federal incentive. Below are the criteria you should meet to qualify for the solar tax credits:

  • You must own a solar energy system: Owning a solar energy system is paramount. Leasing a solar system or participating in a power purchase agreement will automatically disqualify you.
  • Your solar energy system must be new: Solar systems placed in service after December 31, 2005, are eligible for ITC. Any system installed earlier doesn't qualify.
  • You must use your solar energy system for commercial and residential purposes only: It shouldn't be used for other purposes like powering a recreational vehicle.
  • Your solar energy must meet set efficiency requirements: Photovoltaic panels must have a minimum efficiency of 30% and 75% for solar water heating systems.
  • A qualified professional must install the solar energy system: A professional should ensure the installation is correct and safe.
  • Your solar energy system must comply with local building codes and regulations: The system should meet the safety requirements within your local area.
  • Your tax liability must be sufficient: As a tax credit, ITC is meant to offset your tax liability. Therefore, your tax liability must meet the maximum threshold to qualify.

While the above criteria generally define how tax credit pans out annually, they’re subject to change. Therefore, please check for updates on the IRS website or talk to a tax professional.

How To Claim The Solar Tax Credit

Home solar systems are worth the investment. Especially so, the available tax incentives are worth taking and can significantly offset your tax liability. Nonetheless, it helps to understand how to claim your solar tax credit to avoid getting overwhelmed by the highly rigorous process. Below are the steps you should follow to claim your solar tax credit:

  • Assess the amount of your solar tax credit: The ITC value is 30% of the project cost for systems installed in 2022 and 26% for construction projects that finished between 2020 and 2021. However, this percentage will reverse to 26% for systems installed in 2033 and 22% in 2034.
  • Ensure that you have a tax liability: The ITC is meant to help you offset your tax liability, and you should ensure that you have one. If not, you can carry it forward for up to 20 years. That means you won’t lose your tax credit claim even if your tax liabilities are minimum or zero.
  • Get your IRS Form 5695 and fill it out: Get the Residential Energy Credits form and fill it out. This form should also help you calculate the tax credit you'll receive based on your tax liability and the solar energy system installation cost.
  • Add the tax credit to your tax return: Get the U.S. Individual Tax Return (Form 1040) after adding your tax credit from Form 5695. Enter the credit on line 13b.

Please ensure that you keep your documents safe afterward. That includes invoices, receipts, and proof of payment.

What Expenses Are Included?

When calculating your solar system installation cost, you should include the expenses based on the relevant items used. Below are the expenses aggregating the installation amount that qualifies for the federal solar tax credit.

  • Contractor labor costs: These costs include those you accrued during onsite preparation and the original installation, such as developer fees and inspection costs. It also sums up the amount used in assembling the system.
  • Solar panels: Before qualifying for the solar tax credit, it's paramount that you have a solar panel system, which is the program's essential requirement. You should include the solar panels' procurement costs in the overall tax credit you'll receive.
  • Energy storage resources: Your installed energy storage devices have a rating starting from three kilowatt-hours. However, that applies to systems after December 31, 2022. Nonetheless, your storage is still eligible to tax credit if you install it in a subsequent tax year to when you installed the entire solar energy system.
  • All balance of system equipment: Inverters, mounting kit, and wiring are also eligible for the tax credit, whose cost you should also include.

Your expenses should reflect your solar panel system's actual value and installation costs. Alongside meeting the eligibility criteria and getting through the tax credit claim process, you'll be sure to enjoy tax slashes and offset your tax liability significantly.

The Benefits Of Solar Tax Credit

Solar power used to be a luxury and a backup to the national grid for numerous United States homes. However, it can now help you save more while providing numerous other benefits. Below are the benefits of solar tax credits you should accrue:

  • Reduced upfront costs: While you may have spent a lot installing your solar power system, you can rest assured that ITC will return at least 26% of your total installation costs. If you're planning to install one, it would be more appealing if your installation were more affordable due to the tax credit.
  • Lower energy bills: While you may be overly dependent on the national grid for your home’s energy requirements, solar panels can help you minimize the costs. With the tax credit in full swing, you can affordably install your solar panel system if the initial installation cost is seemingly high. That way, your energy bills will be significantly lower.
  • Tax savings: Tax liabilities no longer must weigh heavily on you. Thanks to the federal tax credit, you can offset your tax liability and save more. Besides, installing a solar panel system and meeting the eligibility requirements will get you at least 26% off, which you can plow back into your tax liabilities and pay off the taxes you owe.

Other benefits that ITC offers include helping you minimize your home's carbon blueprint by going green. Due to solar power's clean energy, your contribution to the global environmental protection effort is worth the hassle.

Do Other Incentives Affect Your Federal Tax Credit?

You can get other incentives from your state or district, which typically vary. However, a common concern for most homeowners is whether or not these added incentives can affect their federal tax credit. Such incentives include rebates from your electrical utility, payment for renewable energy certificates, state government rebates, and the state tax credit.

You should know that state tax credits for installing solar PV won't reduce the federal tax credit, and the opposite is true. The same applies to utility rebates from your state government and payment for renewable energy certificates. However, the case is different for the latter. Instead of the payment for renewable energy certificates reducing your tax credit, they'll increase your gross income. You should subtract the amount from your solar costs for electric utility rebates before calculating your tax credit.

Will Solar Tax Credits Expire?

The ITC expires in 2035, extending the initially set 2023 deadline. That's due to its increasing popularity, prompting revision by the U.S department of energy. While 2035 is the specified due date, the program will steadily phase out from 2033, and the tax credit will be slashed from 30% to 26%. A further decrease in the ITC value will follow the year after, in 2034, when homeowners will only receive a 22% credit tax before expiring in 2035.

It's yet to come to light whether or not Congress will renew it. However, there's still more to gain throughout the next decade as more homeowners sign up for the solar ITC.

Conclusion

As more homes try to lessen their carbon footprints with solar power, it's undeniable that the Investment Tax Credit is becoming integral in the general U.S. populace. The solar tax credit's benefits are massive and practical based on energy expenditure savings. While all eyes are on Congress to decide whether the solar ITC will surpass 2035, the country only hopes they won't decide against it.

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Carlos Diaz
I believe in making the impossible possible because there’s no fun in giving up. Travel, design, fashion and current trends in the field of industrial construction are topics that I enjoy writing about.

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