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:
You installed a PV solar system at your property anytime between January 1, 2006, and December 31, 2023 (NOTE: the percentage saving you're eligible for will depend on when your system was installed. For instance, if installed between 2016-2019, it's 30%; between 2020-2022 it's 26%; in 2023 it's 22%).
The PV solar system must have been installed at your primary or secondary residence within the United States. There is also a provision within the legislation that allows for taxpayers to claim solar tax credit after buying a portion of a community solar project.
You own the PV solar system outright that has been installed at your property. You're not permitted to claim the tax credit if you have leased the system.
The solar PV system must be new at the time of installation. The credit is only available to be claimed against the "original installation" of the solar system.
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:
Contractor labor costs for onsite preparation, assembly, and installation.
Permitting fees, inspection costs, and developer fees that are directly related to the original installation.
The cost of the solar PV panels or cells used to power an attic fan (the fan is not covered).
All wiring, inverters, mounting, and balance-of-system equipment that are required to operate the system successfully.
Any energy storage devices that are charged exclusively by the PV panels or cells that have been installed.
- Sales taxes on other eligible expenses.
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.
To help you out, we've explained the various solar incentives available at the state level, as well as an overview of the specific credits, incentives, and rebates available in individual states across the US.
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:
1
Tax 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.
2
Rebates - 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.
3
Low-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.
4
Property 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.
5
Solar 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:
The Residential Arizona Energy Credit - Available to individual taxpayers who install a solar or wind energy device at their home, the Residential Arizona Energy Credit allows the taxpayer to claim against their personal income tax for 25% of the cost of a solar or wind energy device. There is a limit of $1,000 per credit, regardless of how many energy devices are installed. So, for instance, if you spend $4,000 on solar panel installation, you can claim $1,000 back. The credit must be claimed in the year of installation, but it can be carried forward for up to five years, providing the state credit is still active. Like the federal ITC, you must own the solar installation. Leased systems cannot be claimed for.
Solar and Wind Equipment Sales Tax Exemption - Since 1997, Arizona has provided a sales tax exemption for the retail sale of solar and wind energy devices. For homeowners, this simply means that you're not required to pay any tax on the purchase of any solar or wind energy items that you purchase for your residential property.
Arizona Property Tax Exemption - The state of Arizona established a property tax exemption in 2006, which applies to solar energy devices. This means you aren't subject to additional property taxes for the increased value you're adding to your home by investing in solar panels.
SRP Battery Storage Incentive - The SRP battery storage incentive is available to customers of the Salt River Project electricity company. It's a limited-time rebate program that offers customers who install a home battery up to $300 per kilowatt-hour, up to a total value of $3,600. Homeowners must participate in the company's research study into home battery storage, and it's only available to homeowners with certain lithium-ion storage technologies. Click
here for more information about this rebate.
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:
Self-Generating Incentive Program (SGIP) - If you buy a rooftop solar panel system and battery in California, you are eligible for a rebate on the cost of the installation. Several utility companies participate in this rebate program and offer as much as $200 per kWh.
Solar Energy System Property Tax Exclusion - An installed solar system is said to increase the value of residential properties in California by approximately 3%. But residents don’t need to worry about the burden of additional taxes as a result of the added value, thanks to the Solar Energy System Property Tax Exclusion.
Single-Family Affordable Solar Housing - In an attempt to support families of a range of backgrounds switch to renewable energy, the state of California offers eligible, low-income households an up-front capacity-based incentive of $3,000 for every kW of home solar installed at a property. Find out more about this program by clicking
here.
Local Utility Company Rebates - Specific utility companies operating within California offer local rebates to residents who have installed solar. For instance, San Francisco’s GoSolarSF program enables residents to receive a cash incentive of between $100 and $2,000 per kW of home solar installed. Find out more about this program by clicking
here.
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:
Sales and Use Tax Exemption for Renewable Energy Equipment - The implementation of the Sales and Use Tax Exemption for Renewable Energy Equipment in Colorado means that you don't have to pay the state government any money in sales tax to purchase your solar equipment. This legislation has been in place in Colorado since 2006.
Property Tax Exemption for Residential Renewable Energy Equipment - Some people are hesitant to install solar panels at home due to the taxes that may be due as a result of the increased value of their property. But thanks to Colorado's Property Tax Exemption for Residential Renewable Energy Equipment, you don't need to worry about paying additional taxes on any solar project you install at your property.
Local-Level Solar Rebates - Colorado has implemented several local-level rebates designed to reward residents for installing solar technology at their homes. These include:
1
EnergySmart 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.
2
Holy 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.
Colorado Community Solar - For Colorado residents who don't own a property, there's a chance to get involved in a community solar project. Those interested can subscribe to an off-site solar system, enabling residents to benefit from solar without needing to install the panels at their property.
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:
Solar System Property Tax Exemption - Upon installing a rooftop solar system on your Florida home, you are exempt from paying taxes on the increased value of your property, thanks to the Solar System Property Tax Exemption.
Home Solar System Sales Tax Exemption - Florida residents are not subject to a sales tax on the solar equipment they purchase for their properties. This represents a 6% saving on what you would ordinarily have to pay for the necessary equipment.
Florida Net Metering - Florida's encouragement of net metering allows residential homeowners to sell surplus solar energy that has been generated back to the grid. This enables you to sell your power during periods when you're not at home, allowing your solar system to work hard and earn money on your behalf! Click
here for more information about Florida net metering.
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:
Renewable Energy Technologies Income Tax Credit - Thanks to the Renewable Energy Technologies Income Tax Credit, residents of Hawaii can get a 35% state solar tax credit when purchasing a residential solar system. The maximum credit available per resident is up to $5,000, and it works similarly to the federal IPC.
Green Energy Money Saver Program - Implemented to support eligible renters and low- and moderate-income households go green, Hawaii's Green Energy Money Saver Program (GEMS) offers eligible residents special on-bill financing on approved energy improvements. As well as a solar PV system, residents can also save money on solar thermal water heaters and heat pump water heaters. Find out more about GEMS by clicking
here.
Honolulu Solar Property Tax Exemption - An alternative energy product installed on a Honolulu property is exempt from property taxes for 25 years. As well as solar, alternative energy sources considered for tax exemption are wind, hydropower, tidal, wave, solid waste, and increased efficiency in fossil-fuel burning facilities.
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:
Iowa Residential Solar Tax Credit - Iowa's Residential Solar Tax Credit is one of the best (and easiest to understand) incentives found anywhere in the US. Should you install a solar panel system at your residence, you can apply for up to 15% of the system cost back via your Iowa state income tax. There is a maximum credit value of $5,000 per resident.
Renewable Energy Property Tax Exemption - Like many other states in the US, Iowa offers tax exemption to residents who install solar panels at their homes. The added value of the property is assessed once the solar system is installed, and the added value isn't included when the property is considered for taxes within the first five years of the installation of the system.
Iowa Sales Tax Exemption - When you purchase a solar system in Iowa, you're exempt from paying sales tax for the necessary panels and associated equipment, offering a saving of up to 6%.
Net Metering in Iowa - Like Florida, Iowa has started to roll out net metering for residents. Currently, customers of MidAmerican Energy and Interstate Power and Light can participate in net metering if their solar system is under 500 kW. Iowa residents can sell surplus solar power to the utility companies and then use the credits to pay their electricity bills. Click
here to find out more about net metering in Iowa.
Solar Easement Laws - Iowa has introduced laws to help ensure that your residential solar installation isn't covered by shade, which many citizens are initially concerned about before installing solar at their homes.
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:
Residential Renewable Energy Income Tax Credit - Massachusetts residents can apply for a 15% state solar tax credit available for any newly installed home solar systems in the state. A maximum state tax reduction of $1,000 is available to residents.
Solar Massachusetts Renewable Target Program - This long-term sustainable solar incentive is designed to compensate residents of Massachusetts who make the switch to solar energy. Participants are eligible for compensation per kilowatt-hour produced by their solar system that is sold to utility companies. Find out more about this program by clicking
here.
Solar Installation Property Tax Exemption - If you install a new solar system on your Massachusetts home, your property taxes won't go up, even if the value of your property increases.
Home Solar System Sales Tax Exemption - Massachusetts residents aren't liable to any sales tax on solar systems, which offers a 6% saving on solar equipment straight away.
Mass Solar Loan Program - To ensure that solar installations are not only possible for the most affluent within the state, but the Department of Energy Resources has also partnered with the Massachusetts Clean Energy Centre to provide low-interest loans to eligible low-income homeowners to finance a PV solar system.
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 Solar Market Development Income Tax Credit - New Mexico residents who purchase and install a solar panel system qualify to receive a 10% state income tax credit, up to $6,000 of the total cost of the system, thanks to the New Solar Market Development Income Tax Credit.
Solar Renewable Energy Credits (SRECs) - Like many other states, New Mexico is offering residents the chance to recoup SRECs. Customers of El Paso Electric Company and Public Service Company of New Mexico are eligible for compensation per kWh produced by their systems, which are then sold to utilities. Residents can then use the credits to pay other utility bills.
Solar Energy System Property Tax Exemption - Residents who install a rooftop solar system at their residential properties are exempt from paying taxes on the added value of their property.
Solar Installation Sales Tax Exemption - New solar systems purchased in New Mexico aren't subject to sales tax. This represents a 5.125% saving on the purchase price of your new system and associated equipment.
New Mexico Sustainable Building Tax Credit - The state of New Mexico offers a tax credit for newly constructed properties with solar panels installed. Residents can apply for a state tax credit up to the value of $6.50 per built square foot (capped at 20,000 square feet). Your property must be certified as 'sustainable' by the US Green Building Council to be eligible. Click
here for more information about the Sustainable Building Tax Credit.
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:
New York State Solar energy System Equipment Tax Credit - New York residents who buy and install a new solar system with storage can apply for a state tax credit of 25% of the PV installation cost. The maximum value is a $5,000 state tax reduction. Although it's not refundable, unused credit can be carried over to future tax years for up to five years following installation.
New York Sun Megawatt Block Program - Divided into districts, the New York Sun Megawatt Block Program allows eligible residents to receive up to $1,000 for every kW of solar power installed. Participating districts include Long Island, Con Edison territory, and Upstate New York.
Solar Electric Generating System Tax Abatement (SEGS) - Solar panel installation is said to increase home value in New York by around 3.6%. But thanks to SEGS, you won't be subject to higher taxes based upon the increased value of your property.
Home Solar Project Sales Tax Exemption - If you purchase and install a new solar system in New York, you don't have to pay sales tax, offering a saving of 4% right away.
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:
State Property Tax Exemption - While the value of your property will almost certainly increase after installing solar panels, your taxes won't, thanks to North Carolina's State Property Tax Exemption.
Net Metering in North Carolina - North Carolina is one of several states with a comprehensive net metering system that ensures solar energy doesn't go to waste. Residents can trade their surplus solar power for credits that can be used when their systems don't generate sufficient power.
Revolving Loan Options - The state of North Carolina has introduced legislation to support residents to access capital to enable them to install solar at their homes. Solar loan terms in the state can be no longer than twenty years, and interest is capped at 8%.
Solar Panel Rebates - Customers of Duke Energy are offered rebates when they install a solar panel system in their homes. The level of rebate varies and is subject to availability. You can find out more about Duke Energy's rebate program by clicking
here.
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:
South Carolina Solar Tax Credit - Residents of South Carolina are eligible for a 25% tax credit from the total cost of a new renewable energy system in the state. However, the state tax credit can only account for $3,500 or 50% of your tax liability each year for up to ten years.
Santee Cooper Solar Rebate Program - Eligible customers of Santee Cooper can apply for their rebate program, which offers up to $1,200 for every kW of solar power installed. Like other rebate programs, availability is limited. You can find out more about this program by clicking
here.
Net metering in South Carolina - South Carolinians have the opportunity to bank the extra power their systems generate and sell it on to participating utilities. Both Dominion Energy and Duke Energy currently participate in net metering in South Carolina.
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:
Renewable Energy Systems Tax Credit - If you install a new solar panel system at your Utah residence, the state government offers a credit on your state income tax for the following year. Residents can claim up to 25% of the total cost of equipment and installation, up to a maximum value of $1,600.
Solar Easements and Rights - Utah has passed a Solar Easements Law, which prevents residents and developers from blocking out the sunlight needed to power your solar system, offering peace of mind that your solar system can remain effective once installed.
Net Metering in Utah - Utah offers its residents the chance to send surplus solar power generated back to the grid, then receiving credits on their electricity bill. You can find out more about Rocky Mountain's net metering offing in Utah by clicking
here.
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.
