Federal Solar Tax Credit By State - 2023 | All details about federal tax credit on solar photovoltaic system

What Is the Federal Solar Tax Credit?

The Federal Solar Tax Credit is a tax credit offered by the federal government for installing solar panels. This tax credit lowers your tax bill by providing you with a credit for your income taxes.

The solar Investment Tax Credit (ITC) was enacted by the federal government in 2006. Since then, the U.S. solar industry has grown by more than 10,000%, with an average annual growth rate of 50% over the last 10 years. This industry has created hundreds of thousands of jobs and invested billions of dollars in the U.S. economy.

As long as your solar panel system generates electricity for a home in the United States, you can qualify for the ITC for the tax year in which you installed your solar panels.

How Does it Work?

If you purchase a solar photovoltaic system within a given tax year, you can claim a Federal Solar Tax Credit for a portion of the system's cost on your federal income taxes.

The ITC (Investment Tax Credit) offered a 26% tax credit for systems installed between 2020 and 2022 in 2021. The ITC will now provide 30% for systems installed between tax years 2022 through 2032. So, when considering whether to install solar panels, keep in mind that you will receive a discount of between 26% and 30%.

It is important to note that you can only claim the credit once. If you owe less in taxes than the credit you earned that year, your credit will roll over to the following year. Also, keep in mind that the credit is a deduction, not a refund.

What is Included in the Federal Solar Tax Credit?

If you have recently installed a solar panel system in 2022 as a homeowner, you are eligible to claim a federal tax credit that covers 30% of various expenses. These expenses include the cost of solar panels, solar equipment such as inverters, wiring, and mounting hardware, as well as labor costs for solar panel installation. Fees related to permitting and inspections are also covered. Additionally, the tax credit extends to the cost of solar power storage equipment like solar batteries, as long as the storage device has a capacity rating of at least 3 kilowatt-hours (kWh). Furthermore, eligible solar installation expenses may include sales taxes, although some states waive sales tax on PV system equipment.

Federal Solar Tax Credit Eligibility

To be eligible for the Federal Solar Tax Credit, your solar energy system must be new or being used for the first time between January 1, 2006 and December 31, 2023. Keep in mind that the ITC is set to expire in 2024 unless Congress decides to renew it.

Furthermore, you must meet the following requirements:

• You must own the solar system outright and not lease it
• The system must be situated in the United States
• The system must be installed at your primary or secondary residence in the U.S. or at an off-site community solar project.

Solar Energy System Eligibility

Qualifying for the Federal Solar Tax Credit requires the installation of a solar energy system that generates electricity for a residential property. Examples of eligible systems include solar water heaters and solar photovoltaic (PV) systems. Solar water heaters use the sun's thermal energy to heat water, while PV systems convert sunlight into electricity. Both systems meet the requirements for the Federal Solar Tax Credit.

How to Claim Solar Tax Credit

Claiming the Solar Tax Credit

Once your solar power system is installed, you can claim the tax credit only once. Therefore, it is essential to speak to your solar provider to receive the proper documentation and instructions. The following steps should be taken:

1. File IRS Form 5695 as a part of your tax return.
2. Calculate the credit in Part I of the tax form.
3. File your solar system as “qualified solar electric property costs.”
4. Enter your project’s total costs as written in your solar contract on line 1.
5. Complete the calculations on lines 6a and 6b.
6. Calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet on line 14.
7. Complete the calculations on lines 15 and 16.
8. Enter the exact figure from line 15 on your Schedule 3 (Form 1040) on line 5.
9. You can carry over any unused amount remaining on your tax credit that you couldn't claim in a single tax year.

Other Incentives:

1. State-Level Solar Incentives
   In addition to the federal Solar Tax Credit, many states and Puerto Rico offer their own solar incentives to promote the adoption of solar power. These incentives typically include tax credits, rebates, and renewable energy certificates (RECs). States such as California, Texas, Minnesota, and New York offer a high number of solar incentives. However, the specifics of each state's incentives vary, so it's important to consult with your solar installer and check the Database of State Incentives for Renewables & Efficiency for details.

2. State Tax Credits
   State tax credits work similarly to the federal Solar Tax Credit, but apply to your state taxes instead. The exact amount of the credit varies by state, and they usually don't reduce your federal tax credits.

3. State Government Rebates
   Some states offer upfront rebates to homeowners who install solar power systems. These rebates are typically only available for a limited time and may run out quickly, so it's important to research rebates in your state and take advantage of them before they expire. State government rebates can reduce your solar costs by 10% to 20%.

4. Solar Renewable Energy Certificates
   Another type of state-level solar incentive is the Solar Renewable Energy Certificate (SREC), also known as a Solar Renewable Energy Credit. Once you've installed your solar power system and registered it with your state authorities, they will track your system's energy production and periodically offer you SRECs as a benefit. You can sell your SRECs to your local energy utility or another buyer, providing you with payment that is usually considered taxable income.

5. Incentives from Local Utilities
   Local utilities often provide financial incentives to homeowners to encourage them to install solar power systems. Some utilities offer rebates on energy bills based on the amount of energy the system produces, while others provide one-time subsidies to install a solar power system.
   If you receive a per kilowatt-hour credit for the energy your system generates, this is known as a performance-based incentive (PBI).

6. Subsidized Loans
   You may be able to obtain a subsidized loan from your state, local utility, or another non-governmental organization to help finance the purchase of your solar panel system. Before you buy your system, speak with an installer in your area to explore options for subsidized loans. They are likely to be aware of all solar programs available locally.

7. Tax Exemptions
   In addition to tax credits, you may qualify for certain tax exemptions after you install a solar system. Although these systems will increase your property's value, some states and municipalities will not include them when calculating property taxes. This means that your property tax bill will not go up as a result of solar installation.

Useful Links

Federal Solar Tax Credit - Homeowners : by US Department of Energy

Federal Solar Tax Credit - Businesses : by US Department of Energy

Top 10 Solar Energy Companies in USA

Conclusion: By combining different solar tax credits and financial incentives, you can save money on your solar power system installation. Although it requires a substantial amount of money upfront, taking advantage of these programs can significantly lower the overall cost of the system.

FAQs

Q: What is the federal solar energy credit? A: The federal solar energy credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system paid for by the taxpayer. Q: What are the recent changes to the federal solar energy credit? A: The federal solar investment tax credit (ITC) was extended and increased in amount. The ITC is now available for solar systems installed through 2026, with the credit percentage gradually phasing down over time. Q: What other types of renewable energy are eligible for similar credits? A: There are other types of renewable energy that are eligible for similar tax credits, such as wind and geothermal energy. However, these are beyond the scope of this guidance. Q: What is the Inflation Reduction Act of 2022 and how does it affect energy efficient home improvements and residential energy property credits? A: The Inflation Reduction Act of 2022 amended the credits for energy efficient home improvements and residential energy property. The act extended the availability of the credits through 2024, but reduced the credit amounts and imposed new limits on certain categories of property. For more information, see IRS Fact Sheet 2022-40. Q: What is the maximum credit amount for residential energy property expenditures? A: The maximum credit amount for residential energy property expenditures is $500, subject to certain limitations. This credit is available for tax years 2018 through 2021. Q: What is the eligibility criteria for the solar tax credit? A: To qualify for the solar tax credit, your solar system must be new or being used for the first time between January 1, 2006 and December 31, 2023.