Nobody likes doing their taxes, but it’s nice to get a few tax breaks once in a while. Homeowners who have installed PV modules are eligible for the solar tax credit, which reduces the amount of taxes owed to the government. It’s a small incentive from the federal government to encourage homeowners to make the transition to solar power. It’s one of the many benefits of solar energy, and also one of the biggest drivers of growth. Since the solar tax credit was first enacted in 2006, the American solar industry has grown by over 10,000%. The solar tax credit was supposed to end in 2020, but solar advocates and industry lobbyists successfully pushed for an extension until 2023. That means PV systems installed on or before December 31, 2023, are eligible for the tax credit.
As a reminder, this article is simply for informational purposes. This is not tax advice. You should confirm with a professional tax advisor if you want detailed and up-to-date advice about how to claim a solar tax credit.
What is the Solar Tax Credit?
A tax credit is a dollar-for-dollar reduction on the amount of taxes you owe to the federal government within a given tax year. So if you get a $5,000 tax credit, that reduces the amount of taxes you owe by $5,000. The federal solar tax credit is given to owners of solar arrays to help cover the costs of their PV system. Solar panels and the associated installation and equipment costs can be expensive, so the solar tax credit is a form of assistance to help cover the costs. Think of it as a thank you from the government for going green.
How much will the solar credit reduce my taxes?
When the solar tax credit was first enacted, it covered 30% of the cost of a PV system. In the past few years, it has been scaled back. As of 2021, the solar tax credit will cover 26% of the cost of a PV system installed before the end of 2022. So if the total cost of the solar array is $10,000, then the tax credit will be worth $2,600. In 2023 the solar tax credit will be reduced to 22%. Sometimes the amount from the tax credit is larger than the amount of taxes you owe. You can’t get that money back from the IRS, but you can apply the difference to next year’s tax bill. For example, if the solar tax credit nets you $5,000, but you only owe $4,000, then you can deduct $1,000 from your next tax bill.
How do I claim the Federal Tax Credit?
You can claim the federal solar tax credit while filing your taxes. When it’s time to file, you must fill out IRS Form 5695, then enter the results on the corresponding lines on Form 1040. The tax credit is applied to the year that the PV installation was completed. If you began installing in 2019 but didn’t complete the installation until 2021 then you must claim the credit on your 2021 tax return.
Who is eligible for the solar tax credit?
If you meet any of the following criteria, then you may be eligible for the federal solar tax credit.
- You installed a solar PV system between January 1, 2006, and December 31, 2023.
- The PV system is located at your primary or secondary residence within the United States.
- If you participate in an off-site community solar project, then the energy must be credited against your home’s electricity use, but it cannot exceed your total consumption.
- You own the PV system, either paid for by cash or through financing. You cannot claim a solar array that you are leasing, nor can you claim the costs of a solar panel system that you don’t own but are in an agreement to purchase electricity from.
If you meet all of these requirements, you can still claim the credit if:
- You are not a homeowner. If you live in a condominium or are a tenant-stockholder then you can still be eligible for the credit if you contributed to the cost of a PV system. The amount you contributed would be the amount eligible for the credit.
- You installed a PV system in your vacation home. The tax credit also applies to secondary residences, though you have to deduct the amount of time you spent away from the home if you do not live in it all year.
- You are not connected to the electric grid. As long as the solar array generates electricity for your home then it’s eligible.
- You have a home office, or your home is your place of business, although this may make claiming the credit a bit more complicated. As long as you claim more than 80% of the cost of the PV system as a residential expense, then you can claim the credit. But if it’s less than 80%, only the percentage claimed as a residential expense will be eligible for the credit. The rest must be claimed as a business expense.
- If you financed the PV system through the seller and are contractually obliged to pay the full amount, then you can claim the credit based on the full cost. Interest and warranties aren’t covered by the credit.
- You bought a new house that came with a PV system already installed. If you own both the house and PV system, then you can claim the credit assuming the builders haven’t claimed it yet.
Who is not eligible for the solar tax credit?
These situations would make you ineligible for the solar tax credit.
- You are a renter and the landlord of the property installed a PV system. You must be the owner of the system to apply for the tax credit.
- You bought solar panels but have not installed them. You must have a PV system that is installed and in service to claim the tax credit.
- You installed a PV system on a rental unit that you own. The tax credit is for residential purposes only. Solar panel systems installed on rental properties fall under business expenses. There are solar tax credits for businesses that you can still claim.
- You lease the solar array. You must own the PV system, or else the company you leased from claims the tax credit.
How Does the Tax Credit Make Solar Affordable?
The tax incentives are a big benefit of owning your own solar PV system. Up until 2020, they covered 30% of the costs of your solar panels. The tax credit combined with net metering and a reduced or relaxed energy bill means that your solar array pays for itself pretty quickly. Although the tax credit is down to 26%, it’s set to drop even more in a few years so it’s highly recommended that you get one installed soon if your still in the market to buy a PV system. It’s also good to remember that it’s better to own or finance, as you can’t claim the credit if you lease or buy the electricity generated from a neighbor’s solar panels.
What’s covered by the solar tax credit?
The solar tax credit covers all the costs associated with PV systems including:
- Solar panels and/or solar cells
- Solar shingles and solar roof tiles
- Contractor labor costs for onsite preparation. This includes permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, which includes wiring, inverters, and mounting equipment
- Energy storage devices, given that they are charged exclusively by the PV system. They may be claimed later if they are bought or put in service in a later tax year
- Sales fees
These costs are not covered by the solar tax credit:
- Appliances or electronics that are powered by the PV system, even if the system was specifically installed to power those appliances.
- Costs associated with financing, including finance charges, interest, origination fees, and warranty fees.
The solar tax credit is applied to any PV system installed on your home. But what counts as a home? These are considered eligible residences for the tax credit.
- Mobile home
- Cooperative apartment
- Manufactured home that conforms to federal standards
Future of the Solar Tax Credit
The solar tax credit was enacted in 2006 and was set to expire in 2020. Thanks to solar industry advocates and lobbyists, the tax credit was extended in a “step-down” format until 2023. Whereas the original tax credit covered 30% of the cost of a PV system, as of 2020 the credit has been reduced to 26% through 2022. Solar panel systems installed in 2023 will have 22% of the costs covered. Currently, the residential solar tax credit is set to expire on December 31, 2023, unless the federal government decides to extend it further.
The solar tax credit is a great incentive to push homeowners to install solar panels. Costs are a major hindrance for many who are thinking of going solar, so covering costs, even if it’s just a quarter of the expense, is a big help. Since they were first enacted in 2006, the solar energy industry has grown by an average of 52% annually, helping to create hundreds of thousands of jobs and bringing clean energy to countless homes. If your thinking about installing your own PV system, remember that the sooner the better. The credit will cover 26% of the cost of a system installed through 2022, and 22% of the cost for systems installed during 2023. If solar advocates step up to the plate once again, then we can expect the solar credit to be extended even further, but don’t count on it!
Frequently Asked Questions
The solar tax credit is a tax break that covers the costs of an installed PV system. The tax credit covers the costs of the solar panels, inverters, mounting equipment, and the costs of installation. As of 2021, the tax credit covers 26% of the cost of an installed PV system. You can claim the credit when you file your taxes by filling out IRS Form 5695. The PV system has to be fully installed and operational when you claim the credit.
Homeowners who have a fully installed PV system that is owned or being financed can claim the credit. The home must be resided in at least 3 months of the year and be located in the United States. The PV system must have been installed anytime between January 1, 2006, and December 31, 2023. Those who made contributions toward the cost of an offsite community solar credit can claim the credit if a portion of the electricity is being used to power their home.
The solar tax credit will cover 26% of the cost of a PV system until the end of 2022. In 2023, it will cover only 22% of the cost. The credit is set to expire on December 31, 2023, unless the tax credit is extended by the government.
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