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Federal Solar Income Tax Credit (What You Need to Know)

Solar power is growing—exponentially. Today, solar power accounts for over 3% of our electricity needs

Data shows two primary drivers of this exponential growth: 

  1. Affordability—solar prices have fallen by nearly 70%
  2. Incentives offered by the federal government, state governments, and other stakeholders.

    One of the most notable incentives is the Federal Income Tax Credit.  This tax credit puts 30% of your solar installation cost back into your pocket. 

For this Next Earth Solar blog,  we have simplified what the solar income tax credit is, who can claim it and how, what type of solar installation is covered by the ITC and its impact on driving residential solar power across the country. 

But before we delve into details, note that the information presented here is only for the benefit of homeowners interested in going solar. We strive to offer our readers authentic and accurate information, but it should not be taken as financial advice. We recommend consulting a licensed tax professional before making a solar investment. 

What is Federal Solar Income Tax Credit? 

First created in 2006, the Federal Solar Income Tax Credit (ITC) is a 30% dollar-for-dollar tax credit you can claim upon installing a new photovoltaic (PV) system at your property

For example, if you install a solar power system that costs you $20,000, you will be paid back $6,000 in the form of a tax credit. If your federal tax liabilities are $6,000, you won’t pay any tax that year. If you owe less tax than your tax credit, it will be rolled over to the next year until it matches your tax liabilities. Similarly, if your federal taxes exceed $6,000, you will have to pay the rest. 

Solar Tax Credit sometimes goes by different names:

  • Clean Energy Credit
  • Federal Solar Investment Credit
  • Solar Investment Tax Credit
  • Solar Income Tax Credit
  • Federal Solar Tax Credit

The solar tax credit applies to both residential and commercial solar installations, with no upper limit—all you need to have is enough tax liabilities. 

For homeowners, it will continue uninterrupted for the next ten years until 2033, after which it will fall to 26%. Commercial installations will remain eligible for the tax credit until 2025.  They may likely be extended, though its fate would hinge on the decision of the US Department of Treasury.  

Timeline of Federal Solar Tax Credit 

The Solar Tax Credit was implemented in 2006 through the Energy Policy Act of 2005, which created a 30% tax credit for investments in solar energy. It was set to expire in 2006 but was later extended for one additional year. 

In 2008, the Emergency Economic Stabilization Act extended the incentive for eight years and removed an earlier imposed cap of $2,000 for residential solar installations. 

Given its impact—more on it in a while—it was renewed again in 2016 for seven years, December 31, 2022, being the expiry date. 

But, it wasn’t shelved.

 In August 2022, Congress increased the tax credit from 26% to 30% through the Inflation Reduction Act and extended it until 2032. The same act also formally renamed the Federal Solar Income Tax Credit the Residential Clean Energy Credit, though it is still popular as the ITC or solar tax credit.

Did you know?

Since its implementation in 2006, the residential and solar ITC has helped the US solar industry grow by a whopping 200%.

Source: seia.org

All systems installed in 2022, even before the Inflation Reduction Act, until 2033 are eligible for the 30% credit. It will decrease to 26% in 2033, 22% in 2034, and expire from 2035 onwards unless Congress renews it. 

Since it doesn’t have any upper-income limit, people with income of all brackets can claim this incentive upon installing a solar energy system. 

Year ITC on residential PV systems 
2016-201830% 
2020-202126%
2022-203230% 
203326% 
203422% 
2035-onwardsNone 

Source: Office of Energy Efficiency and Renewable Energy

Eligibility criteria for the Federal Solar Tax Credit?

You are eligible to claim the federal income tax credit if: 

  • You installed your solar power system between January 1, 2017, and December 31, 2034. 
  • You installed the system on your primary or secondary residence within the geographical boundaries of the United States. 
  • You are the owner of the system. That is, you purchased it, whether upfront with cash or through financing.

    Note that systems obtained through lease or power purchase agreement, where you only pay for the electricity generated, are not eligible for the ITC. 
  • The system installed is new and used for the first time.

    You cannot claim the solar tax credit  on a system already installed or in use.

    For instance, if you buy a house with an installed solar system, you cannot claim the tax credit on the system.

    However, if you buy a house with a solar system recently installed and assume  that the previous owner has not claimed the tax credit on the system, you might still be eligible. Check with your tax accountant or contact the IRS to confirm your eligibility. Similarly, if you buy a used system, you might not qualify for the ITC. 
  • You purchased an interest in an off-site community solar project, where the electricity generated is credited against, and does not exceed, your home’s electricity consumption.
  • This goes without saying, but you must be an American taxpayer to qualify for the income tax credit. 

What’s covered by the tax credit?

The federal solar tax credit covers the following: 

  • Any type of solar panels, including solar tiles and shingles. 
  • Installation costs, including inspection costs, contractor compensation, labor costs, permitting fees, or any other documentation cost involved in your residence’s solar installation.
  • Associated equipment, including wiring, inverters, relays, switches, mounting frames, or other related electrical hardware costs. 
  • Energy storage devices charged by your installed solar system. 
  • Sales tax on eligible expenses. 

How to claim the solar tax credit?

The first step to claiming the tax credit is to determine your eligibility. We have discussed the eligibility criteria above. If you are qualified, consult your tax accountant and let them know that you have installed a new solar system at your property in the given year. 

The process for claiming solar tax credit: 

  1. Determine your eligibility
  2. Complete IRS Form 5695 
  3. Add to Schedule 3 and Form 1040 

Below are some of the documents you may need: 

Fill out all the forms. While you may fill the form yourself, as they have clearly spelled out what to write and where, we recommend consulting a licensed tax professional. This will make the process smoother and  also help you correctly claim the tax credit. 

Next Earth Solar Tip: Maintain a record of all the expenses you incur in your solar journey from day one. Keep all the receipts and documentation ready before filing your tax returns.

Impact of Federal Investment Tax Credit 

The policy of incentivizing new solar installations has been a complete success story, the ITC being the lead character of this story. Ever since the ITC was established, there has been a steady growth in solar power across the United States. As the graph below shows, solar power across various sectors—residential, commercial, community solar, or large-scale solar installations—has witnessed record growth in the last decade, 33% annual to be precise. 

In 2008, solar power generated merely 0.34 GW; today, solar power capacity in the United States stands at more than 130.9 GW—roughly 3% of our overall electricity needs. This is equivalent to powering around 23 million average American homes. This also means diverting the burden away from fossil fuels and relying on sustainable means for electricity generation. 

In addition, it also had a monumental impact on our economy. More than 300,000 Americans work in the solar sector in thousands of solar companies nationwide. To  put things in perspective, the solar industry generated to the tune of $33b of private investment in 2021. All thanks to the revolutionizing effect of the income tax credit. Due to its driving force, Congress has extended the ITC not once but thrice to date.

Source: SEIA/Wood Mackenzie Power & Renewables U.S. Solar Market Insight

Frequently asked questions about the Federal Solar Tax Credit

Will I get a refund if I don’t have any tax liability? 

No. You must  have a federal tax liability to claim the investment tax credit. This tax is returned in the form of credit and not cash. If you don’t have any tax liability, you won’t get any refund. However, if you do incur tax liabilities the next year or as long as the ITC remains in effect (until 2034 as per the present arrangement), the rolled-over income tax credit will be adjusted against your federal tax obligations. 

Can I get ITC for my roof if I replace it for installing a solar system? 

No. Roofs don’t qualify for the income tax credit. However, if the roof is made of solar tiles or solar shingles, you will qualify for the credit. 

Can I claim the ITC if I have bought the system, but it has not been installed yet? No. Only systems installed on your property are eligible for the solar tax credit. 

Is there any income limit to qualify for the ITC

No. There is no income limit on the Federal Solar Income Tax Credit. When it was first rolled out in 2006, the tax credit was capped at $2,000, but the cap was later shelved in 2008.

If you have further questions about the ITC or solar power in general, give us a call. One of our energy advisors will walk you through the step-by-step process of going solar and maximizing your solar tax benefits. 

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