If you‘ve been thinking about installing solar panels on your home, you may be wondering: is there really a federal tax credit that can slash 30% off the total cost? And if so, how do you go about claiming it? You‘ve come to the right place for answers!
The short answer is yes – the federal solar tax credit can potentially cover 30% or more of your solar installation costs, providing huge savings. There are important details you need to understand to take full advantage, which I‘ll walk you through in this comprehensive guide.
I‘ll explain exactly how the tax credit works, what expenses qualify, how much you can save, eligibility requirements, timing considerations, and more. I‘ll also share tips to maximize savings and highlight the many benefits of solar beyond the tax incentives.
Let‘s dive in!
Overview of the Federal Solar Tax Credit
First, let‘s quickly cover the basics. The federal solar tax credit, also called the investment tax credit (ITC), allows you to deduct 26% of the cost of installing a solar energy system from your federal income taxes. This applies to both residential and commercial solar installations.^1
For a residential solar system placed in service in 2022 or 2023, you can claim a 26% credit. The ITC rate is scheduled to drop to 22% for systems installed in 2034 onwards.^2
This is a dollar-for-dollar reduction in your income taxes. For example, if you install solar panels costing $20,000, a 26% tax credit would reduce your federal income tax bill by $5,200.
The solar ITC has provided a major incentive for homeowners to go solar since it was implemented in 2006. Originally intended to expire, the credit has been extended multiple times, most recently with a 10-year extension in 2020.
Below I‘ll go over all the details you need to utilize this tax credit to maximize savings on your solar project.
What Solar Expenses Qualify for the Tax Credit?
The ITC covers both the solar components and installation costs, including:^3
- Solar modules/panels
- Inverters
- Wiring
- Racking/mounting equipment
- Energy storage devices tied to the solar system
- Labor and other soft costs related to installation
- Sales taxes on materials and equipment
Battery storage systems now qualify as long as they have a capacity over 3 kilowatt-hours (kWh) and are charged by the solar system at least 75% of the time.
Here is a breakdown of typical residential solar costs and the portion that qualifies for the ITC:
| System Cost Category | % of Total Cost | Qualifies for ITC? |
|---|---|---|
| Solar panels | 35% | Yes |
| Inverters | 10% | Yes |
| Racking/mounting | 15% | Yes |
| Electrical equipment | 10% | Yes |
| Installation labor | 20% | Yes |
| Permitting/inspection fees | 5% | Yes |
| Sales tax | 5% | Yes |
| Total | 100% | 85% eligible |
As you can see, most major solar expenses are eligible. For a system costing $24,000, approximately $20,000 would qualify for the 26% credit, equaling $5,200 in tax savings.
Federal Solar ITC Eligibility Requirements
While the credit covers a wide range of solar expenses, there are a few requirements to qualify:
- You must own the solar system, not lease it or have a power purchase agreement (PPA)
- The system must be installed in a home you live in and use as a residence
- It must be new equipment, not used components
- Installation must be completed and operational by December 31 of the year you claim the credit
The home serviced by the panels must be your primary residence. Systems installed on second homes or rental properties only qualify for proportional credits based on personal use and occupancy.
For example, if you install solar on a vacation home used for 3 months per year, you could claim 25% of the full ITC amount (3 months/12 months = 25% usage).
Estimating Your Solar Tax Credit Amount
The fastest way to estimate your potential ITC savings is to use an online solar calculator. These tools allow you to input details like your location, average power bill, and the system size you‘re considering.
The calculator will provide a detailed estimate of how much you can save through the federal tax credit and other incentives. It also accounts for estimated solar production in your area.
For example, let‘s say you get a quote for a 6 kW solar system to install on your primary residence in Phoenix, AZ at a total cost of $18,000. Plugging this into EnergySage‘s Solar Calculator provides the following estimate:^4
- Total 26% federal tax credit: $4,680
- State and utility incentives: $1,500
- Total first year savings: $6,180
That‘s a 34% discount off the gross system cost in year 1! Over one-third of the solar investment would be covered by the ITC and other incentives.
Savings will vary based on your state, utility, system specifics, and annual tax liability. But for most homeowners, the ITC can provide thousands in tax deductions to reduce your overall investment.
How Much Can You Save with the Federal Solar Tax Credit?
Just how much can you save with the ITC? Here are some examples assuming a 26% federal tax credit amount:
| System Size | Gross Cost | Federal ITC Savings |
|---|---|---|
| 4 kW | $16,000 | $4,160 |
| 6 kW | $24,000 | $6,240 |
| 8 kW | $32,000 | $8,320 |
| 10 kW | $40,000 | $10,400 |
These systems costs are representative of 2022 national averages, but your specific quotes may differ depending on your location, equipment selected, and installer. Larger systems will cost more but also provide higher tax credits.
In addition to the ITC, state/local incentives can save you $1,000 to over $5,000 more. Together, these can reduce your out-of-pocket costs by 30-40% or more compared to paying full price.
Over the life of your solar panels, the energy savings stack up to far outweigh the initial investment. But these credits and rebates make solar more affordable from day one.
When to Install Solar to Maximize the ITC Savings
Timing is an important factor to consider if you want to claim the full 26% federal tax credit.
To qualify for the 26% credit in 2023, your solar system must be installed and operational by December 31, 2023.
Simply having a purchase agreement or starting installation does not lock in the 2023 credit rate. The panels have to be active and producing energy by the end of the year.
The ITC rate is scheduled to drop to 22% for systems installed starting in 2034. So installing sooner rather than later allows you to benefit from the higher credit amount.
You also have more years to carry any unused credits forward. Tax credits can be carried forward to offset tax liabilities in future years until used up.
To take advantage of the maximum ITC, you‘ll want to get the process started as soon as possible. Vetting installers, getting quotes, purchasing equipment, and scheduling construction typically takes several months.
If you‘re interested in solar, now is an opportune time to move forward with a project to capitalize on the 26% savings before it drops.
How Do Other Incentives Impact the ITC Amount?
Along with the federal solar tax credit, many states and utilities also offer rebates, performance-based incentives, and tax credits to go solar.
You can "stack" these incentives together with the ITC to maximize savings. But it‘s important to understand the order in which they are calculated when estimating your out-of-pocket costs.
Incentives and rebates provided upfront to reduce the system cost are subtracted first before calculating the ITC. For example, if you receive a $1,000 state rebate on a $24,000 system, your net cost for the federal credit would be $23,000.
On the other hand, direct payments made by your utility do not get deducted upfront from the system cost basis. Your ITC would still be based on the full gross system cost before incentives.
Always ask your solar installer to provide a detailed incentives breakdown to understand the true out-of-pocket cost. Stacked savings can reduce your solar investment by 40-50% or more compared to no incentives.
Benefits Beyond the Upfront Savings
Clearly, the federal solar tax credit provides substantial upfront savings on the cost of installing solar panels. But the benefits don‘t stop there.
After your solar payback period of 4-7 years, your panels will provide free renewable energy for another 20+ years. This protects you from rising retail electricity rates.
Going solar also reduces your carbon footprint and reliance on fossil fuels. Each kW of solar offsets over 1,500 pounds of annual CO2 emissions from conventional power plants.^5 It feels great knowing your home is powered by clean energy from the sun.
You also gain energy independence and security. Solar combined with a home battery storage system provides backup power during grid outages. And it eliminates the volatility of natural gas and oil pricing.
Moreover, investing in solar supports domestic green jobs, technology innovation, and energy independence. The solar boom is fueling economic growth in manufacturing, construction, engineering and related sectors.
Key Takeaways on the Federal Solar Tax Credit
I hope this guide provided a comprehensive overview of how the ITC can save you thousands on the cost of going solar. Here are some key tips to recap:
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Act soon to qualify for the full 26% credit before it drops. Systems must be operational by Dec 31, 2023 to get the 26% rate.
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Stack the ITC with other available incentives for maximum savings between 30-40% in year 1.
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Run an online solar calculator using your specific home details to estimate credits.
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Own your system outright rather than leasing to qualify.
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Choose a reputable local installer with demonstrated expertise.
Thanks for reading! I hope these insights help you leverage the federal solar tax credit to finally make the switch to solar and reap the many benefits. The financial incentives have never been better. Now is the time to harness the sun!