With the US government keen to help citizens transition from overreliance on fossil fuels to more renewable energy sources, there are several solar tax credits and incentives that you may not be aware of.
At the federal level, the Investment Tax Credit (ITC) provides homeowners with the chance to claim money back after installing a new PV solar system at their properties. And at the state level, there are a whole host of state tax credits and incentives to encourage citizens to opt for solar power, many of which we introduce throughout this comprehensive guide.
But first, let's begin by looking at how the solar tax credit works at the federal level and how you can apply if you're eligible.
What is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in the income tax that you're required to pay to the government at the end of the financial year. For instance, if you're eligible for tax credits to the value of $2,000, your federal taxes due will reduce by the same amount.
Some tax credits are granted to individuals, while others are available to businesses operating within specific locations or industries. Although tax credits are commonly confused with tax deductions, they're not the same. Deductions only reduce the amount of taxable income, whereas credits reduce the actual tax due.
There are many federal tax credits available to US citizens, including the solar tax credit, which is the subject of this article.
How Does the Solar Tax Credit Work?
In a drive to encourage US citizens to switch to renewable energy sources, the federal government subsidizes the purchase and installation of solar systems with the solar tax credit. The federal solar tax credit is available for residential homeowners and some commercial businesses.
From a homeowner's perspective, the federal solar tax credit can be claimed on income taxes for 26% of the cost of a solar photovoltaic (PV) system. (Related: What Are Some Available Solar Incentives And Rebates?)
Also known as the Investment Tax Credit (ITC), It first appeared as legislation in the Energy Policy Act of 2005 under the Bush administration and was set to expire just two years later. But its popularity and success in encouraging US citizens to transition towards a renewable energy economy has seen it extended.
In December 2020, Congress passed an extension of the 26% saving for a further two years, reducing the amount to 22% in 2023. There is no maximum amount that a homeowner can claim, but the system must be operational within the tax year and generate electricity for a home located within the United States.
Can I Claim the Solar Tax Credit?
As with all federal tax credits, a stringent list of eligibility criteria must be met if you're hoping to claim the solar tax credit. But as you can see from the list below, it's designed to be inclusive and to encourage people to transition to solar energy. You will be eligible for the federal solar tax credit if:
What Expenses are Included in the Solar Tax Credit?
The solar tax credit's primary attraction is that you can claim 26% of the costs against the original installation of a PV solar system at your home. So naturally, this is attractive to many homeowners who are hoping to transition to a greener source of energy, save on their utility bills, and reduce their federal tax contributions at the same time.
Specifically, the expenses covered by the solar tax credit include:
How do I Apply for the Solar Tax Credit?
If you have installed PV solar panels at your home and meet the listed eligibility criteria, you can apply for the solar tax credit when you submit your tax return. Even if you don't have sufficient tax liability to claim the entire credit in the same tax year, you can rollover the remaining credits to the following years, providing the credit is still in effect at the federal level. To apply for the solar tax credit, you will need to complete IRS form 5695 and attach it to your tax return.
How Much Tax Can I Reasonably Expect to Save By Claiming the Solar Tax Credit?
One of the questions that people often ask before installing a solar system at their home is whether or not it will be worth it financially. According to EnergySage, the average national gross cost of installing a solar panel system in 2021 is $16,890. So, if you're eligible for a 26% tax credit, this represents a dollar saving of $4,618 on your federal tax bill.
In addition to the solar tax credit, you may also be eligible for state cash rebates and certain tax exemptions. Installing a home solar system will also significantly reduce your utility bills in the long run, further contributing to ongoing savings. Overall, if you can afford to invest in a residential solar system, it will undoubtedly be worth your while from a financial perspective.
If the Solar Tax Credit Exceeds my Tax Liability, Will I Get a Refund?
The federal solar tax credit is non-refundable. This means that you won't receive a refund for the amount of tax credit that exceeds your tax liability. But as has already been mentioned, you may carry over any unused amount of tax credit to the next tax year, providing the federal tax credit is still in effect.
What About State Tax Credits?
Homeowners must realize that the federal solar tax credit does not reduce state tax credits and vice versa. So, in addition to the federal solar tax credit, there are a range of state and even city-level incentives that further encourage the transition to solar energy.
In almost all instances, you will be eligible for both federal and state tax solar credits, so you must do your research thoroughly and comprehensively utilize the savings offered to you.
What Solar Incentives are Available at the State Level?
While the federal solar tax credit is a great place to start, it's only really the tip of the iceberg where potential savings are concerned! Solar incentives exist at the state level in many forms, including:
- 1Tax Credits - As we've already seen, tax credits are a way of reducing your annual tax obligation. The federal ITC is available to all Americans, regardless of location, while specific states also offer an additional solar tax credit. We look at some of these states in detail below and explain the extent of their solar tax credits and other incentives.
- 2Rebates - In some states, you can apply for a cash rebate after purchasing a solar system from a particular vendor. The dollar amount of cash rebates varies, and it's usually issued by the local government or a participating utility company.
- 3Low-Interest Loans - If you lease a solar system, you won't be eligible for the federal solar tax credit. A good alternative is to look into low-interest loans that are made available for renewable energy projects. These loans tend to be offered with conditions but allow you to own your solar system outright and pay back the money without being overburdened by high-interest payments.
- 4Property Tax Relief & Sales Tax Relief - You will find that in some states, homes with solar systems are exempt from certain property taxes, which ultimately reduces the homeowner's tax burden. Solar systems tend to be exempt from sales taxes, too.
- 5Solar Renewable Energy Certificates - One of the most innovative aspects of home solar systems is the introduction of Solar Renewable Energy Certificates (SRECs). In participating states, homeowners receive credits in the form of SRECs for the surplus solar energy they generate. By selling power to utility companies through a designated local marketplace, homeowners alleviate the burden on the grid at peak hours and contribute to a greener society. As you can see, there are so many potential savings available to you should you install solar at your property. Now that we've presented the benefits of both the federal ITC and state-level solar incentives, let's take a state-by-state look at some of the financial incentives available to you should you install a PV solar system at your home (NOTE: we don't mention the federal ITC in each section below, which is available in addition to the incentives listed on a state-by-state basis).
Arizona Solar Tax Credit and Incentives
As you might expect from one of the sunniest states in America, Arizona has a range of solar incentives that are up there with the best in the entire country, including:
California Solar Tax Credits and Incentives
Ranked as the best state in the US for solar, California residents are heavily incentivized to turn to renewable energy sources thanks to several state initiatives, including:
Colorado Solar Tax Credit and Incentives
Residents of the Centennial State are heavily incentivized to adopt solar technologies with rebates, incentives, and tax breaks, including:
- 1EnergySmart Colorado: For solar installations at residential properties in Eagle Valley, Roaring Fork Valley, and Summit County, rebates ranging from $400 to $3,000 are available. Click here for more information about this rebate.
- 2Holy Cross Energy: For customers of Holy Cross Energy, a per-kilowatt rebate is available for going solar. The incentive is valued at $750 for the first six kW and is stepped down for bigger systems. Click here for more information about this rebate.
Florida Solar Tax Credit and Incentives
Florida ranks third in the United States in terms of solar potential, and the so-called Sunshine State offers residents incentives to opt for solar energy at their homes, including:
Hawaii Solar Tax Credit and Incentives
Hawaii is another state to make the transition to solar seriously, with a range of attractive state solar incentives, including:
Iowa Solar Tax Credit and Incentives
Iowa residents can tap into a range of incentives if they're hoping to install a solar system at their residential properties, including:
Massachusetts Solar Tax Credit and Incentives
As one of the top ten US states for solar, Massachusetts has several attractive incentives that encourage residents to make the switch to greener energy, including:
New Mexico Solar Tax Credit and Incentives
New Mexico is the second sunniest state in the nation and is the perfect place to set up a residential solar system. Fortunately, the state government has introduced a range of solar incentives, including:
New York Solar Tax Credit and Incentives
Residents of New York State can utilize a range of incentives if they opt to install a solar system at their residential property, including:
North Carolina Solar Tax Credit and Incentives
Residents of North Carolina are heavily incentivized to go solar, with a range of innovative state-level programs, including:
South Carolina Solar Tax Credit and Incentives
Like the North, South Carolina offers a range of incentives to its residents who switch to solar, including:
Utah Solar Tax Credit and Incentives
The final state we cover in this guide is Utah, and the Beehive State offers some impressive solar incentives to its residents, including:
Federal and State Solar Tax Credits: Know What's Available to You
As you're now aware, there are so many financial incentives out there, encouraging US citizens to transition towards a more sustainable energy source.
The bottom line is that you need to be aware of which incentives are applicable to you. As well as the federal IPC, there are a whole host of state-level tax credits, rebates, and programs that can end up saving you thousands of dollars on the cost of installing a solar panel system at your residential property.
Be sure to research your state's legislation thoroughly and apply for all solar credits that are available to you should you be motivated to make the switch to solar energy in the near future.