How Big of a Tax Credit Can I Get for Going Solar?
How many home improvements can you name where someone else will essentially refund up to one-third of the total cost of the equipment for you — including the cost of installation — at the end of the year? Not many, I bet.
But that’s the case right now with installing a solar system on your home. As long as you own your solar system (as opposed to a third party), you may be able to claim residential investment tax credit (ITC), a federal incentive that increased to 30%, thanks to the passing of the Inflation Reduction Act.
Had the Act not passed, homeowners would have received a 26% break this year and 22% in 2023, before the tax credit disappeared completely in 2024. Now, solar customers who own their system can take 30% off the cost of installed equipment for the next 10 years — and the incentive will be retroactively applied to anyone who installed their home solar system since the beginning of 2022.1
How Does the Federal Solar Tax Credit Work?
The residential solar ITC is one of the most important federal policies in support of the growth of solar energy in the U.S. The Solar Energy Industry Association (SEIA) estimates that solar power usage has increased 52% annually since the inception of this tax credit.
An unusual feature of these credits is that there is no maximum amount that can be claimed, as long as it keeps to no more than 30% of your total costs for the alternative energy equipment, including installation. That’s a good thing.
Do Solar Batteries Qualify for a Tax Credit?
The answer is yes. You may also be able to get tax credit for energy storage systems such as home backup batteries, depending on who owns the battery and how the battery is used. If your home solar storage system is owned by another party, you will not be able to claim any tax incentive. If you, the homeowner, own it yourself, and the battery is charged by your home solar panels, your battery system may be eligible for the federal solar tax credit.
Starting in 2023, you may be able to claim the 30% tax credit for stand-alone battery storage as well — meaning it doesn't have to be powered by renewable energy.
How Do I Qualify for the Federal Solar Tax Credit?
To qualify for the federal solar tax credit, you must meet all of the following requirements:
- You must own your home.
- Your federal tax liability must be sufficient to apply for the 30% tax credit.
- You must own your solar panels (leases and PPAs don't qualify).
So, How Do I Claim the Federal Solar Tax Credit?
Simple. You claim the residential solar ITC when you file your yearly federal income tax return. Well, actually, it’s only sort of simple…
Seek professional tax advice first of all, to ensure that you are eligible for the credit. Then complete IRS Form 5695 “Residential Energy Credits” and include the final results of that form on your IRS Schedule3/Form 1040. Don’t forget to attach Form 5695 to your federal tax return.
What About State Solar Tax Credits and Rebates?
Some states offer additional tax incentives, rebates and property tax exemptions for installing a home solar panel system. With these state-level programs, solar tax credit, you can deduct a portion of the cost of your solar panel system from your state tax bill, similar to how it works with the federal tax credits. Rebates from state governments and state tax credits for installing solar PV will not typically reduce federal state but keep in mind that if you receive a state tax credit, your taxable income on your federal return will be higher, as you’ll now have less state income tax to deduct. Selling your RECs on the open market may also increase your gross income, but it won’t reduce your tax credit.2
Solar and storage credits vary significantly by state, but your Sunnova dealer will be up-to-date on your local incentives and can steer you in the right direction.1
What About Those Local Rebates?It may be possible to receive a cash rebate or other incentive from your state, utility company, or other organization that wants to promote solar energy. These local rebates can help to further reduce your system cost and typically are generally available for a limited time. They end once funding has run out, or and end once a certain amount of solar has been installed in the community.
Solar Renewable Energy Certificates (SRECs) & PBIs
Many states have adopted some form of clean energy targets or renewable portfolio standards (RPS) that require utilities to generate a certain percentage of their electricity from solar power. If you live in one of these states, your rooftop solar system will generate Solar Renewable Energy Certificates (SRECs) based on the amount of clean energy your panels produce. These SRECs represent the environmental benefits of renewable generation, not the actual electricity. They are essentially a certificate of property rights over one unit of this “greenness.”
Utilities may have programs under which they may buy your SRECs so that they can claim the environmental attributes toward their requirements, while still allowing you to use the energy from your panels.
Some states and utilities offer performance-based incentives (PBIs), which pay solar-powered homeowners a per-kilowatt-hour credit for the electricity the systems they own produce. Certain PBI programs require that you install equipment manufactured in your state to qualify. Unlike SRECs, PBIs don’t have to be sold through a market, and incentive rates are determined when the system is installed. PBIs may replace or exist alongside net metering policies.
What Expenses Are Included When I Apply for My Federal Solar Tax Credit?
The following expenses may be included:3
- Cost of the solar PV panels
- Labor costs for onsite preparation and original installation, including permitting fees, inspection costs and developer fees
- Additional equipment, including wiring, inverters and mounting equipment
- Residential solar batteries that store energy for later use
- Sales taxes on eligible expenses
Am I Eligible to Claim the Federal Solar Tax Credit in 2022?
You might be eligible for this tax credit this year if you meet all of the following criteria:3
- Your solar PV system was placed in service between Jan. 1, 2006 and Dec. 31, 2034.
- The solar PV system is located at your primary or secondary residence in the United States.
- You own the solar PV system (i.e., you purchased it with cash or through financing).
- The solar PV system is new or being used for the first time. The credit can only be claimed on the original installation of the solar equipment, so if you're buying a home that already has a solar system installed, you won't qualify.
Is the ITC a One-Time Credit?Anyone who buys their solar system outright or finances via a solar loan can claim the solar tax credit as long as they have tax liability in the year of installation. Therefore, the ITC is a one-time credit. However, if you don’t have enough tax liability to claim the entire credit in one year, you can carry any leftover amount forward to the next year as long as the tax credit is still in effect.
So, What Am I Waiting For?
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1. Sunnova makes no guarantees regarding eligibility of any of the system’s costs for tax benefits. Sunnova does not provide tax advice. Contact your personal tax advisor for eligibility requirements.
3. This list is sourced from: https://www.energy.gov/sites/prod/files/2020/01/f70/Guide%20to%20Federal%20Tax%20Credit%20for%20Residential%20Solar%20PV.pdf
4. This blog provides an overview of the federal residential energy credit for those interested in residential solar photovoltaics or PV and battery storage. It does not constitute professional tax advice or other professional financial guidance. And it should not be used as the only source of information when making purchasing decisions, investment decisions, or tax decisions, or when executing other binding agreements