Federal Solar Tax Deduction Explained: How to Get the Most Out of It
As we move toward a greener future, the role of solar energy continues to grow in parallel. For those still on the fence, there are significant benefits to going solar, and with residential solar panels more affordable than ever — plus, installation rates are lower — it might be time to consider a solar energy system.
To add to this, the Inflation Reduction Act, which came into effect in August 2022introduced a generous tax credit for citizens who want to install solar panels on their roof. It is known as the residential clean energy creditand it can give you that extra help beyond financing to help you power your home with solar energy. It’s a great way to offset some of the costs that you incur while setting up your system.
Here’s everything you need to know about how the tax deduction works and how you can benefit from it.
What is the Federal Solar Tax Deduction?
The residential clean energy credit itself isn’t entirely new. Formerly called the investment tax credit, it’s been around for years, but has been significantly expanded under the Inflation Reduction Act.
“It was actually already scaling down before the IRA was approved,” he said. Gilbert Michaudan assistant professor at the School of Environmental Sustainability at Loyola University Chicago. “As part of the Inflation Reduction Act, they just said, ‘We’re going to reduce all the risk and change and uncertainty,'” and raised it again.
The credit now covers up to 30% of the cost of new, qualified clean energy improvements to your home made between now and 2033. That includes projects like solar, as well as boilers, wind turbines, geothermal heat pumps, fuel cells and battery storage technology.
The solar credit is just one of the tax credit and rebate programs in the Inflation Reduction Act. The legislation’s incentives can also save you money on electric vehicles, EV chargers and energy-efficiency upgrades for your home.
How does the federal solar tax deduction work?
This federal stimulus, while generous, won’t directly put cash in your pocket. Instead, it will reduce the amount of money you pay in federal taxes.
For example, if you install a $15,000 solar panel, you qualify for a $4,500 federal tax deduction. That means your tax bill the following year will be reduced by $4,500. (This is different from a typical tax deduction, which reduces your overall taxable income and can also reduce your tax bill.)
If the tax credit you qualify for is more than the amount you initially owe in taxes, “you can carry over the excess, unused tax credit … and use it to reduce the taxes you owe in future years,” according to the IRS.
What is covered by the solar tax deduction?
The Clean Energy Home Credit covers a wide range of home energy improvements. When it comes to solar, the credit covers:
- The cost of the actual solar panels and associated hardware
- The labor costs for installation and assembly
- All electrical work required to connect the solar panels to your home
- All ‘soft costs’, such as permit costs
“It’s really an all-in-one question: ‘How much did you spend to get this on your roof?’” Michaud said.
Other roofing costs, such as new support beams or shingles, are not included in the solar tax deduction.
How do I claim the federal solar tax deduction?
The process for claiming the federal tax deduction is pretty simple. Here’s how it works:
- Work with a solar panel installer to complete the installation of your rooftop solar system.
- The following year, when you file your tax return for the year your solar panels were installed, you will complete the IRS form Form 5695, Residential Energy Credits.
- Because the credit reduces your tax bill, you won’t necessarily “receive” anything. But when you file your tax return, the credit will reduce your tax bill for that year.
If you use software like TurboTax, it’s even easier: The system will ask you if you installed solar panels in the past year. If so, check the box.
“These software packages make it easy for consumers,” said Michaud.
What about the state tax benefits?
While the federal tax deduction can cover up to 30% of your solar costs, there is still a significant cost left over for your home improvement project.
But depending on where you live, you may be able to get additional state tax credits that can reduce the cost of solar even further. This guide outlines some of the most generous state incentive programs, including those in Illinois, New York, and South Carolina. Some states also offer property tax and sales tax exemptions for solar panels.
You can find out what’s available in your state by contacting your utility company or doing a quick Google search for your state’s solar tax credit program. Even if there isn’t a credit available where you live, there may be some sort of subsidy or net metering policy that can help offset the cost of solar.
Solar energy resources in your state
not defined
How accessible are solar panels for home use today?
In general, installing solar panels for homes is more accessible today than ever before.
“These residential solar systems are now more affordable than ever,” Michaud said. “And with the tax credit going back up to 30 percent, you have this beautiful, perfect storm.”
On top of the cost savings, there are also more installers with more experience. Sometimes you can have your solar system installed in just a day or two, start to finish, Michaud said.
And now that the federal tax credit is set for the next decade, this trend is likely to continue: more homeowners installing solar panels, greater economies of scale and more opportunities to reduce costs.
Frequently Asked Questions About Solar Tax Credits
When can I claim the federal solar tax deduction?
Any solar energy system installed after January 1, 2006, qualifies for the one-time tax credit. If your system was installed and generated electricity in your home in the past year, you can claim it on your tax return. But if you buy and install one this year, you’ll have to wait until next year to claim the tax credit.
What are the criteria to qualify for the solar energy deduction?
You can claim the credit once for the original installation of the equipment. You must own the solar PV system and it must be located on your primary or secondary residence. (In some cases, an offsite community solar project may also qualify.) If you lease solar panels, you will not receive a tax credit. However, there is no maximum amount that can be claimed. Additionally, if you financed the system through the manufacturer and are contractually obligated to pay for it in full, you can claim the credit based on the full cost of the system.
How many times can I claim the solar tax deduction?
There is no annual or lifetime cap on the residential clean energy tax credit, with the exception of fuel cells.
Is there an income limit for the federal solar tax deduction?
There is no income limit, but the amount you can receive from the tax deduction is limited to the amount you would pay in taxes that year. The tax deduction is non-refundable. However, you can carry over any excess unused tax deductions and use them toward taxes you owe in future years.
Can I claim the federal solar tax deduction if I don’t have to pay taxes?
Because the credit is non-refundable, it is limited to the amount of taxes you owe that year. However, unused credits can be carried over to future years.
CNET’s Dan Avery contributed to this report.
