The Investment Tax Credit (ITC), also known as the Federal Solar Tax Credit, is a significant incentive for homeowners in the United States to invest in renewable energy systems. The tax credit reduces the cost of installing a solar or other qualifying renewable energy installation between 2022 and 2032.
Homeowners may receive up to 30% of the total cost off their installation. That amount will decrease to 26% for systems installed in 2033 and 22% for systems installed in 2034.
Key Takeaways for Claiming the Federal Solar Tax Credit
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Receive up to a 30% Tax Credit: In 2024 and 2025, the ITC remains at 30% of the total cost of installing a solar energy system.
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How to claim the credit: To claim the solar credit on your 2024 taxes, your system must have been fully installed and placed in service by December 31, 2024.
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How it Works: The credit is a dollar-for-dollar reduction in the federal income tax you owe.
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Example: If your solar system costs $20,000, you can claim a tax credit of $6,000.
What Is the Federal Solar Tax Credit?
The Federal Solar Tax Credit is a financial incentive provided by the United States government to encourage the use of solar energy. It allows homeowners to deduct a portion of the cost of installing a solar energy system from their federal income taxes. The credit was first established in 2006 and has since been extended multiple times.
Before claiming the solar tax credit, you must ensure that you are eligible to claim it.
What Expenses Are Included In The Federal Solar Tax Credit?
According to the Department of Energy website, the following expenses are included:
1. Solar photovoltaic (PV) panels or PV cells
Including those used to power an attic fan, but not the fan itself.
2. Contractor labor costs
This includes onsite preparation, assembly, and original installation, including permitting fees, inspection costs, and developer fees.
3. Balance-of-system equipment
Including wiring, inverters, and mounting equipment.
4. Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater
This requirement is for systems installed after December 31, 2022. If the storage is installed in a subsequent tax year to when the solar energy system is installed it is still eligible; however, the energy storage devices are still subject to the installation date requirements.
5. Sales taxes on eligible expenses
If any expenses fall under the above items and are subject to sales tax, then that tax may be included in the credit.
What Steps Do I Need to Take to Qualify for the Federal Solar Tax Credit?
Step 1: Install a qualifying solar energy system
To claim the federal solar tax credit, you must first install a qualifying solar energy system. Qualifying systems include solar panels, solar water heaters, and fuel cells that use renewable resources to generate electricity or heat. The system must be new and placed in service by the end of the tax year.
Step 2: Determine the system's cost
You should determine the total cost of the qualifying solar energy system. This includes the cost of the equipment, installation, and other related expenses. The cost of the solar energy system must be reported on IRS Form 5695.
Step 3: Claim the tax credit
To claim the federal solar tax credit, you should complete IRS Form 5695, Residential Energy Credits, and attach it to your tax return. Once you've completed Form 5695 you will need to include the credit amount on your Form 1040 or 1040-SR.
The solar tax credit is a non-refundable credit, which means that if your credit exceeds your tax liability, you won't receive a refund for the excess amount. However, you can carry over any unused portion of the credit to future tax years. For example, if your solar tax credit for 2022 is $2,600, but your tax liability is only $2,000, you can carry over the remaining $600 credit to the following tax year.
Step 4: Consider state and local incentives
In addition to the federal solar tax credit, many states and localities offer their incentives to encourage solar energy system installations. You should research the incentives available in their area to take full advantage of the benefits of renewable energy.
Investing in solar energy not only reduces energy costs but also promotes sustainable energy practices that benefit the environment. The federal solar tax credit is a valuable incentive for homeowners in the United States to invest in solar energy systems. By following these four steps, homeowners can claim the tax credit as described in the 2022 Inflation Reduction Act.
DISCLAIMER
Qualifying battery storage technology of 3kWh or more must be installed by a connection to a dwelling in the United States, lived in by the taxpayer. You should always consult your tax professional to determine your eligibility for your individual situation.
Outbound Power does not guarantee any tax credit based on our products, and any information we provide is for educational purposes only and should not be considered legal advice. It does not constitute professional tax advice or financial guidance. It should not be used as the only source of information when making purchasing decisions, investment decisions, tax decisions, or execution. Consult a tax professional to evaluate your eligibility.
Effective date: January 1, 2023.
