If you have installed a solar photovoltaic (PV) system on your home or purchased an interest in a community solar project, you may be eligible for a federal tax credit that can help you save money and go green.
The solar tax credit, also known as the investment tax credit (ITC) or the Residential Clean Energy Credit, allows you to deduct a percentage of the cost of your solar system from your federal income taxes. The current rate of the credit is 30% for systems installed in 2020-2022, and 22% for systems installed in 2023.
The credit expires starting in 2024 unless Congress renews it.
But what are the requirements for qualifying for this incentive? And how can you claim it on your tax return?
Here are some key points you need to know:
Requirements for Qualifying for the Solar Tax Credit
To qualify for the solar tax credit, you need to meet the following criteria:
• You must own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity generated by a system you do not own).
• The solar PV system must be new or being used for the first time. You cannot claim the credit for a used or refurbished system.
• The solar PV system must be located at your primary or secondary residence in the United States or at an off-site community solar project that credits your home’s electricity consumption. (Resources: www.irs.gov/credits-deductions/home-energy-tax-credits)
• The solar PV system must be placed in service during an eligible year (2020-2023). The system is considered placed in service when it passes city inspection and is ready to use.(Resources:www.energy.gov/sites/default/files/2023-03/Federal-Solar-Tax-Credits-for-Businesses-3-23.pdf)
The solar energy tax credit requirements are that you own a new or first-time used solar PV system that is located at your residence in the United States and that is placed in service during an eligible year (2020-2023).
How to Calculate the Amount of the Credit
The amount of the credit you can claim is based on the cost of your solar system and the applicable percentage rate. The cost includes both equipment and installation expenses, such as panels, wiring, labor, permits, and fees.
The percentage rate depends on when you install your system. For systems installed in 2020-2022, the rate is 30%. For systems installed in 2023, the rate is 22%.
For systems installed after 2023, there is no credit unless Congress extends it.
For example, if you install a $15,000 solar system in 2021, you can claim a $4,500 ($15,000 x 30%) credit on your tax return.
How to Claim the Solar Tax Credit on Your Tax Return
To claim the solar tax credit, you need to fill out Form 5695 (Resources: www.energy.gov/sites/default/files/2021/02/f82/Guide%20to%20Federal%20Tax%20Credit%20for%20Residential%20Solar%20PV%20-%202021.pdf) and attach it to your federal income tax return.
You also need to keep receipts and invoices of your solar expenses and proof of installation date and ownership.
You can use Form 1040 https://www.irs.gov/newsroom/irs-releases-frequently-asked-questions-about-energy-efficient-home-improvements-and-residential-clean-energy-property-credits or Form 1040-SR https://www.energy.gov/eere/solar/articles/federal-solar-tax-credit-resources to report your total credits and reduce your tax liability.
If your tax liability is lower than your credits, you can carry forward any excess amount to future tax years until it is used up or until the credit expires.
Expiration Date of the Credit and Possible Extensions
The solar tax credit is scheduled to expire at the end of 2023 unless Congress extends it or makes it permanent. There have been several proposals to do so, such as the Renewable Energy Extension Act and the Growing Renewable Energy and Efficiency Now Act.
However, none of them have been passed into law yet. Therefore, if you want to take advantage of this incentive, you should act soon before it is too late.
The solar tax credit is a valuable benefit that can help you save money and go green with solar energy. However, you need to meet certain requirements and follow certain steps to qualify for and claim it. You also need to be aware of the expiration date of the credit and any possible extensions or changes in the future.
For more information about the solar tax credit, you can visit the following resources:
• [Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics] from the U.S. Department of Energy
• Residential Clean Energy Credit https://www.energy.gov/sites/default/files/2021/02/f82/Guide%20to%20Federal%20Tax%20Credit%20for%20Residential%20Solar%20PV%20-%202021.pdf from the Internal Revenue Service
Q: Does the solar tax credit affect state and local incentives?
A: No, the solar tax credit does not affect state and local incentives for solar energy. You can claim both the federal credit and any other incentives that are available in your area.
However, some state and local incentives may require you to reduce your eligible costs by the amount of the federal credit. You should check the rules and regulations of each incentive program before applying.
Q: Does the solar tax credit apply to battery storage?
A: Yes, the solar tax credit also applies to battery storage systems that are charged by solar energy. However, there are some conditions that you need to meet to qualify for the credit.
For example, your battery system must have a capacity of at least 3 kWh, must be installed after January 1, 2023, and must be used primarily for your home’s electricity needs.
Q: What are the signs of a qualified solar system?
A: A qualified solar system is one that meets the following criteria:
• It uses solar photovoltaic panels or cells to generate electricity for your home.
• It is new or being used for the first time. You cannot claim the credit for a used or refurbished system.
• It is owned by you or financed by a loan that you are responsible for repaying. You cannot claim the credit for a leased system or a power purchase agreement.
• It is located at your primary or secondary residence in the United States or at an off-site community solar project that credits your home’s electricity consumption.
• It is placed in service during an eligible year (2020-2023). The system is considered placed in service when it passes city inspection and is ready to use.