The Federal Solar Tax Credit, Give Me a (Tax) Break!: Explaining the Federal Solar Tax Credit

According to the Office of Energy Efficiency and Renewable Energy, anyone who installs a solar photovoltaic (PV) system between 2022 and 2032 will receive a 30% tax credit. People will be eligible for a 26% credit in 2033 and a 22% credit in 2034 unless Congress decides to extend the 30% credit. At this time, no credit will be rewarded for installations occurring in 2035 or later. The Federal Solar Tax Credit, or Investment Tax Credit (ITC), is part of the Inflation Reduction Act that President Biden signed into law on August 16. If you installed a PV system earlier this year and haven’t already claimed credit, you are also eligible for the 30% tax credit.

History of Solar Tax Credits

The ITC has a long history in the United States. According to Palmetto Solar, the Federal Solar Tax Credit was created as part of the Energy Policy Act of 2005. It was also a 30% credit. It was set to expire after 2006 but was expanded to 2007. The original ITC was capped at a maximum credit of $2,000. In 2008, Congress signed the Emergency Economic Stabilization Act, which extended the 30% credit until 2016 and ended the $2,000 credit limit. Since 2016, Congress has extended the credit multiple times. Before the passing of the most recent credit, the tax value was set at 26% for 2022 and 22% for 2023 and would expire in 2024. The new tax credit will be set at 30% for 11 years, which is the longest extension the ITC has ever received. Additionally, the ITC will now include battery storage systems that have a capacity rating of 3 kilowatt hours or greater (starting in 2023).

What’s included?

The tax credit covers more than just the cost of the PV system. According to Energy Sage, it includes the cost of the solar panels, battery storage systems, sales tax, and installation. The tax credit applies to other energy-efficient purchases as well. According to Forbes Advisor, people can also get a 30% credit (maximum of $1,000) for the purchase and installation of EV chargers in their homes. Electrical circuit panels, heat pumps, and Energy Star certified exterior doors are also eligible for the 30% credit. It is important to note that any rebates you may receive from the utility company must be subtracted from the system cost before calculating the 30% tax credit. However, rebates from the state do not usually affect the tax credit. Additionally, any state tax credits you may receive will not affect your total return at the federal level.

Claiming the Credit

In order to qualify for the tax credit, you must own the system. It can be for your home or business, but you do not qualify if you are leasing the solar panels. There is no income limit, so everyone who purchases a PV system is eligible for the tax credit. To claim the tax credit, you must include it on your yearly federal tax return. You must fill out IRS Form 5695 and use information from the document to add to Schedule 3 and Form 1040. Instructions for completing IRS Form 5695 are included here. If the total tax credit amounts to more than you owe in federal taxes, you will be able to roll over the credit for the following year. For example, if you owe $30,000 in federal taxes and were credited $35,000, you would pay $0 in 2022, and your total federal tax due in 2023 would be reduced by $5,000.