Residential Solar

A tax credit is a direct reduction in the amount of income tax you owe. For instance, if you claim a $1,000 federal tax credit, your tax liability is reduced by $1,000. The federal tax credit for solar energy is often referred to as the Investment Tax Credit (ITC), though it differs from the ITC available to businesses that own solar systems.

The federal residential solar energy credit allows homeowners to claim a percentage of the cost of installing a solar PV system on their federal income taxes. This credit is available for systems installed between January 1, 2022, and December 31, 2034. The credit was set at 26% for systems installed in 2020 and 2021, but thanks to an extension passed by Congress in August 2022, the credit increased to 30% for installations made from 2022 through 2032. The credit will decrease to 26% in 2033 and 22% in 2034, and it will expire in 2035 unless renewed by Congress. There is no maximum limit on the amount that can be claimed, making it a significant incentive for those considering solar energy.

To qualify for the federal solar tax credit, you must meet the following criteria:Installation Timing: The solar PV system must be installed between January 1, 2017, and December 31, 2034.Property Location: The system must be installed at a residence you own in the United States.Ownership: You must own the system, whether purchased outright or financed. Leased systems or those purchased under a power purchase agreement (PPA) do not qualify. Additionally, if you own a share in a community solar project and the energy generated is credited against your home’s electricity consumption, you may also qualify.System Condition: The solar PV system must be new or used for the first time. The credit is only available for the original installation of the solar equipment.

The federal solar tax credit covers several expenses related to your solar PV system, including:Solar PV panels or cells (including those used for powering an attic fan, excluding the fan itself)Contractor labor costs for onsite preparation, assembly, installation, permitting fees, inspection costs, and developer feesBalance-of-system equipment such as wiring, inverters, and mounting equipmentEnergy storage devices with a capacity of 3 kWh or greater (for systems installed after December 31, 2022). If the storage is installed in a different tax year than the solar system, it still qualifies but is subject to the original installation date requirements.Sales taxes on eligible expenses

If your utility provides a rebate for installing a solar PV system, it is generally excluded from income taxes due to a federal exemption. However, this rebate reduces your system costs before calculating your federal tax credit. For example, if your system costs $18,000 and your utility provides a $1,000 rebate, your tax credit would be based on $17,000, resulting in a $5,100 credit (30% of $17,000). Rebates for excess electricity generation, such as net metering credits, do not affect your eligibility or the amount of your federal tax credit.

If you receive payments for selling RECs or other environmental attributes of the electricity generated by your system, those payments are typically considered taxable income. However, they do not reduce the amount of the federal solar tax credit.

Unlike utility rebates, state government rebates generally do not reduce your federal tax credit. If you received a $1,000 state rebate on an $18,000 system, your federal tax credit would still be calculated on the full $18,000, resulting in a $5,400 credit.

State tax credits for installing solar PV generally do not reduce federal tax credits. However, if you claim a state tax credit, the amount you save on your state taxes might be considered taxable income at the federal level, depending on your overall tax situation and the state and local tax (SALT) deduction limit set by the Tax Cuts and Jobs Act of 2017.

The federal solar tax credit is a powerful incentive for homeowners considering solar energy. By understanding how it works and how other incentives may impact it, you can make informed decisions about your solar investment. Whether you're planning a new installation or considering upgrades, taking advantage of this tax credit can significantly lower the cost of your solar energy system.