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Earning Tax Breaks For Installing Solar Panels

Alternative energy solutions have been a topic of much science and debate over the years, and many Americans are choosing to install solar panels in their homes to reduce electricity and home energy costs. The recent Inflation Reduction Act is now giving even more incentive to do so, offering major tax breaks for installing solar panels. 

With the new legislation’s Residential Clean Energy Credit, you can subtract 30 percent of the cost of installing solar heating, electricity generation, and other solar home products from your federal taxes.

There has never been a better time to switch to solar!  Here’s how it works:

What Is the Residential Clean Energy Credit?

With the Inflation Reduction Act’s Residential Clean Energy Credit, those who install solar energy equipment in their residence any time this year through the end of 2032 are entitled to a nonrefundable credit off their federal income taxes, equal to 30 percent of eligible expenses.

There’s no dollar limit on those expenses; you’re entitled to that 30 percent tax break whether you spend $20,000 or more than $100,000 on costs associated with a residential solar system.

This 30 percent credit lasts until Dec. 31, 2032. It will drop to 26 percent in 2033, 22 percent in 2034, and will end in 2035 unless Congress decides to continue it.

Applicable expenses include:

  • Solar photovoltaic (PV) panels
  • PV cells used to power an attic fan (but not the fan itself)
  • Contractor labor for onsite preparation, assembly, or original installation
  • Permitting fees, inspection costs, and developer fees
  • All equipment needed to get the solar system running, including wiring, inverters, and mounting equipment
  • Storage batteries (you can claim the tax credit for these even if you buy and install them a year or more after you install the solar system)– these battery storage units must hold at least 3 kilowatts
  • Sales taxes on eligible expenses

How Does A Tax Credit Work?

This credit is meant to lower your federal income taxes. So, 30 percent of whatever you spend on your solar installation will then be deducted from the federal taxes you owe for the year. If the 30 percent of your solar costs are larger than what you owe, the remaining credit can get carried over into the next year.

In addition to the money saved through this tax break for solar panels, homeowners will save money in electricity bills and raise the value of a home when it comes time to sell. The amount saved will depend on many factors, such as the electricity a household uses, the size of the solar panels, how much sunlight is received, and local electricity rates.

Who Can Receive This Solar Tax Credit?

The Federal solar tax credit, available to all American taxpayers of all tax brackets based on their taxable income, applies to any primary or secondary residence within the US. Taxpayers must purchase a solar panel system, not lease one, to receive these benefits. These credits can be used whether you itemize your taxes or take the standard deduction.

The same applies if you are a member of a power-purchasing cooperative. However, if you are a tenant-stakeholder in a co-op, you can claim credit for your portion of the purchase. You can also claim credit for your portion of a community-owned solar system purchase.

What if I Already Receive a Tax Credit for Solar Install (State or Federal)?

If you are already receiving a state tax break for solar panels, it will be up to your state’s taxing authority whether your state credit is reduced if you take advantage of the federal one. The new law doesn’t reduce federal credit if your state offers one.

For example, New York does not cut its solar incentives for people who take advantage of federal ones; state residents can credit 25 percent of qualified solar energy system equipment expenditures from their state taxes, up to $5,000. You don’t get a tax refund if that amount is more than you owe, but you can carry over the difference for up to five years.

The new law also includes an improved Non-business Energy Property Credit. This credit covers other qualifying energy efficiency upgrades, such as Energy Star-certified exterior windows, Energy Star-certified exterior doors, air-sealing insulation, upgraded electrical circuit panels, and heat pumps. You can claim both credits on your federal return. Depending on when the installations are completed, this could be done in the same year or in different years.

This credit, now named the Energy Efficient Home Improvement Credit, has dollar caps for some products—for example, $600 on windows. For most items, however, you can claim 30 percent of the cost up to $1,200 annually. (Heat pumps are exempt from the per-item or per-year maximums; you can claim up to $2,000 for heat-pump purchase and installation costs.)

You can also claim the Nonbusiness Energy Property Credit every tax year through 2032. In the past, taxpayers who exceeded “lifetime limits” for qualifying home improvements under that provision couldn’t claim the credit for later improvements.

How To Qualify For The Solar Tax Credit

To qualify for the Solar Tax Credit, also known as the Investment Tax Credit (ITC), follow these key steps:

Ownership and Eligibility: Ensure you own the solar system and it meets eligibility criteria. Generally, residential and commercial properties are eligible.

Installation Timeframe: The solar system must be installed and operational in the tax year you claim the credit or have begun construction.

30% Credit: The ITC offers a 30% tax credit on the total cost of your solar installation, including equipment and installation expenses.

Federal Tax Liability: Have sufficient federal tax liability to claim the full credit. If your credit exceeds your tax liability, it can often be carried forward to the next tax year.

Claiming Tax Credit For Solar Panels

To claim a tax credit for solar panels, first, verify if your solar panel system qualifies by ensuring ownership and compliance with relevant quality and safety standards. Research the specifics of the available tax credit, which, as of 2023 tax bill, typically involves the federal Investment Tax Credit (ITC) providing up to 30% of the solar system’s total cost. 

Keep detailed records of all expenses related to your solar panel system, including equipment, installation, and associated costs, as you’ll need these for documentation.

When filing your federal tax return, use IRS Form 5695 to claim the Solar Tax Credit. Input the eligible expenses and calculate the credit according to the provided formula. 

It’s advisable to consult a tax professional to ensure accurate completion of the tax forms and to maximize your solar tax credit benefits based on your unique tax circumstances. 

Most vital, stay informed about the latest tax laws and updates for the most up-to-date guidance on solar tax credits.

How Ethical Energy Can Help

It has always been a great money-saving decision to install a solar power system for your home, and this is true now more than ever before! Not only can solar panels lower your home electricity costs and increase the value of your home, but the cost of installation and solar panel maintenance in recent years has become much more affordable for the average homeowner. 

With the new law that offers an added tax break for solar panels, the benefits far outweigh the hassle. Now is the time to contact a reputable solar energy company that can help you to take the next steps!

Ethical Energy is a leader in solar panel installation. We pride ourselves on using cutting-edge technology with smart best practices to save our customers money without sacrificing quality or service.

Contact us today or call us at (888) 909-6377 to discuss the next steps you need to take to start your solar journey!


Does The Residential Solar Tax Credit Apply To New Home Purchases?

The Residential Solar Tax Credit, also known as the Solar Investment Tax Credit, is applicable to both existing and newly constructed homes. Whether you install solar panels on an existing home or incorporate them during the construction of a new home, you are eligible for the tax credit. The key requirement is that the solar panel system must be for a residential property that you own and live in

How Many Times Should You Claim The Solar Tax Credit?

You can claim the Solar Tax Credit for each eligible solar panel system you install. There is no limit on the number of times you can claim the credit. However, the credit is typically a one-time benefit for each solar panel installation. If you install multiple solar systems on different properties or at different times, you can claim the credit for each individual system.

Can I Claim The Solar Tax Credit While Leasing My Solar Panel System?

No. If you are leasing a solar panel system, you generally cannot claim the Solar Tax Credit. The tax credit is usually available to the owner of the solar system, which is often the leasing company or a third-party financier. They can benefit from the tax credit, and the savings may be factored into your lease terms, indirectly reducing your lease payments.