Solar Tax Credit By State 2024 – Forbes Home – Forbes

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With the average cost of solar energy systems coming in at around $16,000, making the switch to solar is a substantial investment. Still, while the upfront numbers can feel intimidating, there are incentives at federal, state and local levels that can help ease the impact. This guide on solar tax credit by state will help you navigate the numerous offers available, saving you big on your installation cost and setting you up for long-term cost savings.

Key Takeaways

  • The federal solar Investment Tax Credit (ITC) offers a direct reduction in taxes owed as an incentive for installing a new solar energy system.
  • Per the Inflation Reduction Act, the ITC is 30% of the solar system cost until 2033 and will gradually reduce until it expires in 2035.
  • Property tax exemptions, SREC markets and utility rebates differ locally.

What Is a Tax Credit?

A tax credit is a direct reduction in the amount of tax an individual or business owes to the government. Unlike tax deductions that reduce taxable income, tax credits eliminate the actual tax liability, providing a dollar-for-dollar reduction in taxes owed. Tax credits cover various areas, such as childcare, education and energy efficiency, incentivizing certain socially or economically beneficial actions by providing financial relief through the tax system.

Tax credits typically have specific eligibility criteria, meaning taxpayers must meet certain qualifications or undertake particular actions to qualify. Credits can vary in value, with some being fixed amounts based on qualifying steps taken or purchases made, while others offer a percentage of the total amount spent.

What Is the Federal Solar Tax Credit?

Also referred to as the solar Investment Tax Credit (or ITC), the federal solar tax credit aims to encourage investments in renewable solar energy. The tax credit covers a specific percentage of the solar system’s costs, reducing the taxpayer’s federal income tax liability by that amount. It applies to both solar panel equipment and installation costs but does not cover any structural modifications made to support the panel.

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How Does the Federal Solar Tax Credit Work?

To qualify for the federal solar tax credit, the taxpayer must own the solar energy system. Those in a lease or a power purchase agreement (PPA) with the solar installer aren’t eligible for the tax credit, as they aren’t considered system owners. Additionally, the taxpayer’s tax liability has to cover the amount of the credit. Any remaining credit can carry over to subsequent years if the full amount isn’t met in that year’s tax bill.

Solar Tax Credit Extension

Congress implemented the Inflation Reduction Act in 2022, which brought several significant changes to the solar tax credit. Most notably, it extended the timeline to 2035 and increased the credit amount from 22% to 30% through 2032. Those who installed a system in 2022 and haven’t claimed the credit yet can increase their credit amount to 30%.

Another key change was the expansion of eligible equipment to include energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more, including standalone storage. The U.S. Department of Energy strongly recommends pairing these storage devices with solar systems for enhanced benefits and energy capabilities.

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The Inflation Reduction Act Solar Tax Credit Step-Down Schedule

What Does the Federal Solar Tax Credit Cover?

The federal solar tax credit covers the following:

  • Solar panels or PV cells
  • Solar water heaters
  • Energy storage devices with a capacity of 3 kWh or more
  • Contractor labor expenses, including site preparation, assembly or initial installation
  • Permit fees
  • Inspection costs
  • Developer fees

Federal Solar Tax Credit Eligibility

You may qualify for the federal solar tax credit if your installation meets these criteria:

  1. Your solar system was installed between January 1, 2017, and December 31, 2034.
  2. The system is located at your U.S. residence, which the IRS defines as somewhere you’ve lived in for the year in which you’re claiming, which can include a house, mobile home, houseboat, condominium, cooperative apartment and manufactured home.
  3. You either own the solar system outright (bought with cash or financed but not leased or part of a power purchase agreement with the solar company) or you have purchased an interest in an off-site community solar project, with electricity credited against and not exceeding your home’s usage.
  4. The solar system is new or in first-time use: the credit applies solely to the original installation of the solar equipment.

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Solar Energy System Eligibility

To be eligible for the federal solar tax credit, you need to install a solar-powered energy system that provides electricity to a U.S. residence. Solar panels, solar water heaters and energy storage devices are all included in the credit.

Solar Water Heaters

Solar water heaters feature a solar collector and storage tank, harnessing the sun’s thermal energy to heat the water. To qualify for the tax credit, solar water heaters must be certified by the Solar Rating Certification Corporation or a similar entity that your state endorses.

Solar Panels (Photovoltaic Systems)

Solar panels, or photovoltaic (PV) panels, are flat structures resembling windows that convert sunlight (in the form of photons) into electricity. There are three types of solar panels—monocrystalline, polycrystalline and thin-film—that can significantly decrease your electricity expenses.

Energy Storage Devices

Standalone energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more are also eligible for the solar tax credit. These do not need to be tied to a solar system to qualify.

How to Claim Solar Tax Credit

After purchasing and installing your solar power system, the tax credit can only be claimed once. You can work with your solar provider to obtain the necessary documentation and apply the credit to your taxes. Here are the steps to claim the solar tax credit:

  1. Fill out IRS Form 5695 and include it in your tax return.
  2. In Part I, calculate the amount of the tax credit.
  3. Classify your solar system as “qualified solar electric property costs.”
  4. On line 1, input your system’s total cost (do not include the cost of structural modifications to accommodate the system).
  5. On lines 6a and 6b, perform the calculations.
  6. On line 14, list any tax liability limitations (see the IRS instructions for Form 5695 for more information).
  7. Complete the calculations on lines 15 and 16.
  8. Enter the figure from line 15 on line 5 of your Schedule 3 (Form 1040).

Any unused portions of the tax credit that surpass the tax liability can carry over to next year’s taxes.

When Should I Go Solar?

To get the most from the federal solar tax credit, the best time to go solar is any time before December 31, 2032. The credit reduces in 2033 and 2034, and is set to expire in 2035. If it’s within your budget and you have a long-term plan to go solar, getting it done sooner can maximize your potential energy savings and ensure you get the full tax credit.

Still, while the timeline is limited, it’s important to determine whether solar panels are worth it for you. A major factor is how long you plan to stay in your home—energy savings will trickle in over time, so you should be in your long-term residence before investing. Other considerations include the amount of sun you receive and electricity rates in your area. Comparing current costs to potential savings will help you decide if it’s the right time to switch.

How Do Other Incentives Affect the Federal Solar Tax Credit?

Most solar rebates, tax credits and renewable energy certificates for new solar customers won’t directly impact the solar ITC. However, they can reduce the credit amount if they lower the total cost of the installation. For instance, utility rebates are subtracted from your system costs before calculating the tax credit. Also, payments received for renewable energy certificates may be considered taxable income, potentially increasing your federal tax liability.

As for state government rebates, these generally won’t reduce federal tax credits. State tax credits for solar installation typically don’t affect federal costs directly. Still, claiming a state tax credit might raise reported taxable income on federal taxes due to reduced state income tax deductions, which can affect federal tax liability.

State Solar Incentives

In addition to the solar ITC at the federal level, some states offer incentives for new solar system purchases. The Database of State Incentives for Renewables & Efficiency has specific details for each participating state.

State Tax Credits

Certain states offer additional tax credits for solar system purchases. These work similarly to the solar ITC, except the tax credit gets deducted from any state taxes owed. The amount of tax credit varies by state.

State Government Rebates

State government rebates for solar energy are typically a set amount of money given to those who purchase a solar system or other qualifying solar technology (e.g. solar water heaters and solar batteries). These are typically available regardless of whether or not the homeowner owes any federal taxes.

Solar Renewable Energy Certificate

Part of the EPA Green Power Partnership, a Solar Renewable Energy Certificate (SREC) is a state-level solar incentive. SREC markets operate based on renewable energy certificates that symbolize the rights to non-power aspects of renewable electricity generation. These SRECs represent each megawatt-hour generated from solar systems.

In states with SREC markets, homeowners and businesses with solar systems can lower their energy costs by selling associated SRECs to utility companies. Supply and demand determine the monetary value of an SREC, with much of the demand coming from electricity suppliers needing to comply with their state’s Renewable Portfolio Standard (RPS) or pay a compliance premium.

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Other Incentives

Along with rebates and tax incentives at the federal and state level, there are several other potential avenues to save on the cost of installing solar panels.

Local Utility Rebates

Local utility companies often offer rebates for installing a solar PV system. These subsidies are excluded from income taxes. The rebate amount is subtracted from the total solar system cost before calculating the solar tax credit.

Subsidized Loans

Subsidized loans offered by state entities or local utility companies aid in financing solar panel purchases. Solar installers can typically guide customers on available local solar programs, including subsidized loan options.

Tax Exemptions

Property tax exemptions allow homeowners and businesses to exclude the increased value from a solar system when assessing property taxes. Since property taxes are locally collected, some states allow local taxing authorities to offer this solar-related tax incentive.

Bottom Line

With tax credits and other benefits at federal, state and local levels, it’s a great time to go solar. While solar energy systems can be pricey upfront, the relief from these incentives and the long-term ROI of solar panels can make them a wise investment.

Frequently Asked Questions (FAQs)

How many times can you claim the solar tax credit?

You can only claim the solar tax credit once, as of current tax laws. However, if you purchase and install multiple separate solar systems on different properties that you own, you can claim the credit once for each solar system.

Is the solar tax credit refundable?

The solar tax credit is non-refundable. The system owner’s tax liability must cover the full amount of the tax credit. Any unused credit amount can carry over to future tax bills.

Is there an income limit for the federal solar tax credit?

There is no income limit for the federal solar tax credit. However, since tax liability must cover the amount of the credit, individuals with lower taxable incomes may need to carry unused credit amounts to subsequent years before receiving the full credit.

Can I use the federal solar tax credit if I do not owe any taxes?

You cannot use the federal solar tax credit if you don’t owe any taxes for that year. It’s a non-refundable tax credit, meaning it can’t generate a refund beyond your tax liability. Any remaining credit can roll over to subsequent years until the solar tax credit expires.

How big of a difference is a 26% tax credit versus a 30% tax credit?

The Residential Clean Energy Credit of 30% means that a solar energy system installation costing $16,000 will gain a tax credit of $4,800. At the 26% rate starting in 2033, the tax credit for the same system would generate $4,160, making it a difference of $640.

Will there be a tax credit for solar in 2024?

There will be a solar tax credit of 30% in 2024 throughout at least 2032. Per the Inflation Reduction Act of 2022, the credit will remain accessible and increase from 22% to 30%. The tax credit is currently set to expire in 2035.

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