What is the Federal Solar Tax Credit?

One of the best ways of reducing your household expenses is to install a solar panel system on the roof of your home.

Depending on the size and shape of your roof, you might be able to install enough solar panels that most months you have almost nothing to pay on your electricity bill.

It sounds great.

The major problem stopping people from going ahead with a solar panel system for their home is the huge upfront cost of installing solar.

The bigger the system you can install, the more you will save, but it will also cost more to install.

Regardless of the size and cost of your solar system, you will usually repay the cost of your solar system from your electricity savings within 3 – 6 years. After that, your electricity savings continue every month up to 25 years and beyond.

Every year it seems like the cost of solar panels are reducing. This is mostly due to their increasing popularity, and as more panels are made the cost of manufacturing each individual panel reduces slightly.

One option is to wait until the cost of a solar system for your home falls further while your savings grow larger.

Another option is to buy your solar panels before the end of 2023 and take advantage of the federal solar tax credit.

How does a tax credit work?

A credit is different from a deduction, and much easier to calculate.

An $800 federal tax credit can be used to reduce your federal income tax by $800.

What is the federal solar tax credit?

The federal residential solar energy credit can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system.

You must claim the credit against your taxes in the tax year that the system was installed

For the tax years 2020 – 2022, the tax credit is 26% and this reduces to 22% in 2023.

So, if your system is installed in 2022 and cost $15,000, you will gain a tax credit of $3,900. In 2023, your tax credit for the same system would be $3,300.

The tax credit expires starting in 2024 unless it is renewed by Congress.

There is no maximum amount that can be claimed.

How do I know I’m eligible for the tax credit?

You might be eligible for this tax credit if you meet all the following criteria:

• Your solar system was installed between January 1, 2006, and December 31, 2023.
• The solar system is located at your primary or secondary residence in the United States.
• You own the solar system either by cash or with finance, but not if you are leasing the system.
• The solar system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.

What expenses are included?

The following expenses are included:

• Solar panels or cells used to power an attic fan (but not the fan itself)
• Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
• Balance-of-system equipment, including wiring, inverters, and mounting equipment
• Energy storage devices (batteries) that are charged exclusively by the associated solar panels
• Sales taxes on eligible expenses

What if my electricity supplier provides a rebate?

In most circumstances, the amount of the rebate is excluded from the tax credit.

So, using the same example from earlier in this article, for a $15,000 solar system installed in 2022, your tax credit would be 26% of the balance after the rebate is deducted from the full installation cost.

If the rebate was $1,000, then your tax credit would be 26% of $14,000 = $3,640.

What about a rebate form my state government?

Unlike rebates from your power supplier, state government rebates are not excluded from the tax credit.

So, a $15,000 Solar system installed in 2022 with a state government rebate of $1,200 would still get a tax credit of 26% of $15,000 = $3,900.

Am I eligible if I am not a homeowner?

Yes, if you paid for the system, you could claim the credit.

So, you could install a system on the home of one of your children.

But remember, you can only claim the tax credit once. If you later wanted to install a system on your own home or another child’s home, you would not get the tax credit.

A couple could install two systems, and both claim the tax credit individually for each of the installations.

Can I install on my vacation property?

Yes. The tax credit works the same is if it was your primary residence. However, if you rent this property out you would need to claim it as a business expense instead.

What if my Solar panel system is off grid?

Yes, you are still eligible for the tax credit.

What if my home is used for business purposes?

Providing at least 20% of the solar system is used for residential power purposes, then you can claim for the full tax credit.

However, if only 15% of the power produced was for residential power purposes, in 2022 you could still claim 26% of 15% of the installation costs.

The balance of the installation costs would be claimed as a business expense.

For those that dedicate one room of their home as an office, as this will be far less than 80% of the homes power usage, you would be eligible for the maximum available tax credit.

Am I still eligible if I borrowed to purchase the Solar system?

Yes. You can still claim the tax credit on the full installation cost.

However, the tax credit does not include interests, loan establishment costs, extended warranties, or any other additional costs related to the loan.

How much can I claim if I buy a house with a solar system in 2022 but I don’t move in until 2023?

How much you can claim will depend on when the solar system was installed. If the house was built and the solar system installed in 2022, even though you didn’t move in until the following year, you would claim 26% for the 2022 tax year.

This also applies if you buy a house before 2024 but don’t move in until 2024 when the tax credit no longer applies (unless the federal government reintroduces a tax credit). Provided the solar system is installed onto your house and is in working order during the 2023 year, then you can claim the tax credit for that year.

Depending on the cost of your Solar panel system, the amount of the current tax credit is quite significant. Any cost reductions of solar panel systems over the next few years are unlikely to be as much as the current tax credit.

If going solar makes sense for you and you can purchase a system now, you would be better off to buy now and take advantage of the tax credit than to wait another 2 – 5 years.