The Solar Tax Credit, officially called the Residential Clean Energy Credit, is a tax credit that allows you to deduct up to 30% of the cost of your solar energy system from your federal taxes. By helping to offset the cost of purchasing residential solar, the tax credit is designed to get more homeowners to install solar, stimulate investment in the solar industry, and accelerate the pace of solar investment and innovation.
In this article, we will explain what the Residential Clean Energy Credit is, how the federal solar tax credit works, the value of tax credits for home solar, the history of solar tax credits, how to claim the solar tax credit on your tax returns, and then answer FAQs that you might have.
What Is The Residential Clean Energy Credit?
The Residential Clean Energy Credit is a solar tax credit that’s like a coupon for 30% off your home solar installation, backed and funded by the federal government. In the year that you install solar, the Residential Clean Energy Credit can greatly reduce or even eliminate the taxes that you would have otherwise owed to the federal government.
The Residential Clean Energy Credit is the current name of the solar tax credit that was originally known as The Investment Tax Credit (ITC) and created by the Energy Policy Act of 2005.
Thanks to the ITC, the growth of the solar industry helped create hundreds of thousands of jobs, injected billions of dollars into the US economy, and was a significant step towards cutting down on greenhouse gases, so it was very popular. According to the Solar Energy Industries Association (SEIA), “The ITC has helped the U.S. solar industry grow by more than 10,000% percent since it was implemented in 2006.”
With the signing of The Inflation Reduction Act Of 2022, the ITC was renamed the Residential Clean Energy Credit, the value was increased to 30%, and the deadline was extended through December 31 of 2034.
How Does The Federal Solar Tax Credit Work?
As a homeowner, you can claim a federal solar tax credit for the amount of money that you pay towards installing solar, and reduce the amount you owe when you file your yearly federal tax return. (The solar tax credit does not apply to state tax or any local taxes.) The Residential Clean Energy Credit can be filed one time for the tax year in which you install your system using Tax Form 5695.
The credit received is then calculated dollar-by-dollar as a reduction of your federal tax liability, so if you receive $1,000 in credits, you’ll owe $1,000 less in taxes. Once you calculate how many credits you’ve received, you will want to add your renewable energy credit information to a typical Form 1040 while filing your taxes.
Note that a tax credit is different from a tax refund. In order to claim a tax credit, you must owe taxes to the government, so that the tax credit can cancel out some or all of the amount that you owe.
If you don’t owe any taxes (for example, if you’re retired and don’t have any income) then you wouldn’t receive any money for the tax credit, because you didn’t owe any money to begin with. If you’ve already had those tax dollars deducted from your paycheck, then you can get that money back in the form of a refund, but you’re only getting back money that you’ve already paid.
Lastly, the solar panel federal tax credit can be used against either the federal income tax or the alternative minimum tax, so regardless of how you calculate the taxes you owe, you can be eligible to claim the value of the federal income tax credit for solar.
Value Of The Solar Tax Credit
In 2023, the Residential Clean Energy Credit covers up to 30% of the cost of your solar power system. However, you may be surprised to learn that there is no maximum dollar amount that can be claimed as a tax credit for your solar installation! As long as you owe enough in federal taxes for the credit to cover, you can claim up to the full 30%, regardless of how large your solar power installation is.
The solar tax credit covers any product that directly connects to your solar power system or is needed for the installation, such as solar panels, mounting equipment, inverters, wires, and battery storage systems. The tax credit also covers other items related to getting panels installed on your roof, such as labor costs, assembly, installation, inspection costs, and sales tax.
For any solar project that finishes construction between 2022 and 2032, the value of the solar tax credit is 30% of the project’s cost. After that date, the step-down schedule is as follows:
- 30% - Projects where construction finishes between 2022 and 2032
- 26% - Projects where construction finishes in 2033
- 22% - Projects where construction finishes in 2034
- 0% - Projects where construction finishes in 2035 or later
History Of The Solar Tax Credit
The current value of the Residential Clean Energy Credit is 30%.
However, renewable energy tax credits have gone through a variety of extensions, value changes, and step-down plans, including the following:
- 2005 - The Energy Policy Act of 2005 created the U.S. Federal solar tax program and the residential “25D” investment tax credit equal to 30% of the qualified solar expenditures. The 25D tax credit had been set to expire just a year later, but was extended for one additional year in subsequent Legislation.
- 2008 - The 2008 Emergency Economic Stabilization Act (aka the “bank bailout”) extended the ITC for eight (8) years (through 2016) and eliminated the $2,000 monetary cap on the credit amount.
- 2009 - The American Recovery and Reinvestment Act (or “Stimulus Bill”) broadened the definitions of qualified expenditures and technologies, and also supplemented the ITC with the Solar 1603 Grant program (funding since depleted) that provided payments in lieu of tax credits. These cornerstone policies are largely credited with jumpstarting growth and investment in the solar industry and sector.
- 2015 - Legislation delayed the sharp and scheduled step-down from 30% → 10%, setting up a softer decline schedule (26%-22%) in 2020-2021.
- 2020 - History repeated itself when industry advocates again delayed the ITC step-down schedule as part of the COVID relief bill. The ITC value was set to 26% in 2022, and 22% in 2023, before being scheduled to expire in 2024.
How To Qualify For The Solar Tax Credit
In order to qualify for the solar panel tax credit, you must own your home (not lease or rent) and you must pay enough taxes to the federal government (tax liability) that the Residential Clean Energy Credit can offset your tax payment.
For example, if you paid $10,000 to install solar on your principal residence in 2023, then the 30% Residential Clean Energy Credit would mean you are eligible for a tax credit of $3,000. In order to claim that credit, you need to have owed at least $3,000 in federal taxes before the solar tax credit. If you owed more than $3,000 then the Residential Clean Energy Credit would reduce the total amount that you owe. If you owed less than $3,000 then the Residential Clean Energy Credit would eliminate your tax liability for that year.
In addition, if you do owe less than your total Residential Clean Energy Credit savings for the year that you install your solar system, you can actually “roll over” any remaining credits to the following year, so that you don’t lose the value of those credits.
For example, if you were eligible for $6,500 in tax credit, but only owed $4,000 that year, then you would completely eliminate your tax payment for that year, and the next year you would be able to deduct an additional $2,500 from that year’s tax payment as well.
You are also eligible to claim the solar tax credit even if the solar energy system is not on your primary residence. As long as you own the property and live in it for part of the year, you can still claim part of the credit on your taxes to reduce the amount that you owe. However, if you put solar on a pure investment property, such as one that you rent out full time, then you cannot claim the solar energy tax credit.
How To Claim The Tax Credit For Solar Panels
Note: We’re solar experts at Palmetto, but everyone’s tax situation is unique, so please consult with a tax expert to determine what’s best for you. That said, if you’re looking for information on how to file for a solar panel tax credit, here’s a general overview of how homeowners can claim their Residential Clean Energy Credit:
- Determine Eligibility - Make sure you have enough tax liability that you can use the federal Residential Clean Energy Credit to lower the amount you owe for taxes.
- Complete IRS Form 5695 - This form is available online, and validates that you’re qualified for renewable energy credits.
- Add The Credits To Your 1040 - Once you’ve determined your solar Residential Clean Energy Credit credit information from Form 5695, you use that total on your Form 1040 to reduce the amount you owe.
How Many Times Can You Claim The Solar Tax Credit?
You can only claim the solar tax credit one time for your solar power installation. If you have any unused amount remaining on your tax credit that you are unable to claim in a single tax year, you may be able to carry over that tax credit value for up to five years.
Can you claim the solar tax credit twice?
Technically you cannot claim the solar tax credit twice if you own your home. However, if you own more than one home, you may be able to claim separate tax credits for solar installations on each of those homes.
In addition, if you add additional equipment to an existing solar installation, you may be able to claim a tax credit for that added installation cost as well. In general, we always advise customers to speak with a tax professional about any specific tax credit questions, as each situation is unique.
What If My Tax Bill Is Less Than My Tax Credit?
If your tax bill is less than the value of your solar tax credit, there is a provision that allows you to carry forward the tax credit to a future tax year. To learn more about your options in that situation, check out Solar Tax Credit: What If Your Tax Liability Is Too Small?
Does The Residential Solar Tax Credit Apply To New Home Purchases?
If you buy a new home that already has solar installed, you can still claim the Residential Clean Energy Credit in the year that you move in, regardless of when the house was originally built or sold. For example, if your home was built in 2020, and then you bought it in 2021, but didn’t move in until 2023, then you would claim the Residential Clean Energy Credit on your 2023 taxes.
Keep in mind, the Residential Clean Energy Credit can only be claimed once, so you’ll want to check and make sure that your builder hasn’t already claimed the credit. If your builder has claimed it, then you may be able to ask for a reasonable allocation for those costs, and factor that into the final purchase price.
Can You Claim The Solar Tax Credit If You Lease Your Solar Panel System?
If you lease your solar panels, you do not qualify for the Residential Clean Energy Credit directly, but the company that you lease from may use that tax credit to help lower your monthly payments.
Many solar companies offer leasing options where they will pay for the installation and the cost of the equipment, and then they charge you a monthly fee for the use of those solar panels. The solar company acts as a third party and owns the panels during the terms of the lease, and the homeowner gets the benefit of lower monthly energy costs.
Because the solar company owns the panels, they will typically receive the solar tax credit, and the homeowner won’t qualify for the tax incentives. Solar leasing companies may use the value of those tax incentives to lower the monthly cost that they charge homeowners, but it’s typically not going to be a direct pass-through savings, as the solar company will want to retain some of that value.
If you lease your solar panel system, you will not typically receive most state and local solar incentives either, though again, the company you lease from may use those incentives to offset their costs and help lower your monthly payment. In some special cases a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs), but this depends on where your home is located.
Why Now Is The Best Time To Install Solar Panels
The Residential Clean Energy Credit getting increased to 30% means that now is a great time to go solar. You can take advantage of additional savings, and move toward an electrified future for all of your home’s energy needs. This landmark legislation shows our government’s commitment to supporting the clean energy economy, and is a clear sign to homeowners that now is the right time to install solar panels.
The solar tax credit has been a major driver of solar industry growth, and for many homeowners, the price difference of a solar power system with and without that tax credit is going to be significant. That’s why there’s never been a better time to go solar and take advantage of the maximum amount of the tax credit that’s still available while you can.
How To Get Started With Solar And Claim Your Residential Clean Energy Credit
If you’ve ever considered going solar, and thought about how to get your solar tax credit, then there’s never been a better time to get started! The Residential Clean Energy Credit allows you to get money back on your solar energy system, and going solar now will ensure you get the biggest return on your investment while the solar tax credit is still available.
Over the years, solar tax credits have played an important role in influencing federal policy incentives for clean energy in the United States. The long-term stability of the Residential Clean Energy Credit will allow businesses to continue driving down costs and investing in their own growth, and by investing in solar, you will be helping create jobs and strengthen the economy, while saving yourself money in the process.
Get started today with a free design and savings estimate from Palmetto, to learn more about how the solar power federal tax credit can help reduce your out-of-pocket expenses. Solar panels are a great way to offset your energy costs and reduce the environmental impact of your home, while giving you energy independence and control over your family’s future. Now is the time to install solar and take advantage of the Residential Clean Energy Credit!
