Solar Tax Credit By State in 2024: The Ultimate Federal Solar Energy Tax Credit Guide (2024)

Installing your own solar power system can be an intimidating process, especially for your wallet. Adding one to your home is a significant investment—on average, solar panels cost about $16,000.

But, home solar power systems can save you a significant amount of money in the long term. Plus, there are several rebates and tax credits to help encourage homeowners to take the plunge and begin producing renewable energy. There are benefits at the federal, state and local level that may earn you money back for installing a qualifying system.

If you’re interested in comparing home solar systems, Forbes best solar panels guide can be a great starting point for beginning your research.

What Is a Tax Credit?

Tax credits are a powerful tool that can help you reduce your taxable income and directly impact your annual tax bill.A dollar-for-dollar reduction of the income tax you owe, a tax credit can reduce the amount of tax you owe or increase your tax refund. They also differ from deductions and exemptions.

What Is the Federal Solar Tax Credit?

Installing solar panels earns you a federal tax credit. That means you’ll get a credit for your income taxes that actually lowers your tax bill.

The federal government enacted the solar Investment Tax Credit (ITC) in 2006. In the years since, the U.S. solar industry has grown by more than 10,000% with an average annual growth of 50% over the last 10 years. The industry has created hundreds of thousands of jobs and invested billions of dollars in the U.S. economy

You can qualify for the ITC for the tax year that you installed your solar panels as long as the system generates electricity for a home in the United States.

Related: Best Solar Companies

How Does the Federal Solar Tax Credit Work?

When you purchase a solar photovoltaic (PV) system during the tax year, you are eligible for a Federal Solar Tax Credit that you can claim on your federal income taxes for a percentage of the cost of the system.

In 2021, the ITC provided a 26% tax credit for systems installed between 2020 through 2022. The ITC will now provide 30% for systems installed in tax years 2022 through 2032. So, when deciding whether to install solar panels, factor in a 26% to 30% discount.

It’s essential to note that you can only claim the credit once. If the taxes you owe that year are less than the credit you earned, your credit will roll over to the following year. Also, remember that the credit is a deduction, not a refund.

Solar Tax Credit Extension

The Solar Investment Tax Credit has offered tax reduction incentives for homeowners who choose to “go solar.” On August 16, 2022, embracing residential solar energy became even more enticing when the Federal Government signed the Inflation Reduction Act of 2022 into law.

Among numerous climate-conscious consumer and industry incentives, the most impactful is the increase, expansion and extension of the Residential Clean Energy Credit—also known as the Solar Investment Tax Credit (ITC).

The ITC effectively raises the amount of credit you can apply against your income tax burden from 26% to 30%. Instead of decreasing next year as scheduled, it’s been extended until 2032 before it reduces again. The tax credit is also retroactive to solar energy systems installed during the 2022 tax year. Here’s what you need to know about the ITC and how to make it work for you.

The Inflation Reduction Act Solar Tax Credit Step-Down Schedule

Although the ITC will be around for at least the next decade, it will begin to phase out in 2033. At that time, the credit amount steps down to 26%. In 2034 it will be further reduced to 22% and eliminated for the tax year 2035.

What Does the Federal Solar Tax Credit Cover?

If you are a homeowner that recently installed a solar panel system in 2022, you are eligible to claim a federal tax credit that covers 30% of the following:

• Solar panels cost
• Solar equipment costs like inverters, wiring and mounting hardware
• Labor costs for solar panel installation, including fees related to permitting and inspections
• Solar power storage equipment costs like solar batteries. Storage devices must have a capacity rating of at least 3 kilowatt-hours (kWh).
• Sales taxes paid for eligible solar installation expenses (though some states waive sales tax on PV system equipment)

Federal Solar Tax Credit Eligibility

You can qualify for the ITC as long as your solar system is new or being used for the first time between January 1, 2006 and December 31, 2023. Unless Congress renews the ITC, it expires in 2024.

Other requirements include:

• You must own the system outright (not lease it)
• The system must be located in the United States
• The system must be located at your primary or secondary U.S. residence or for an off-site community solar project

Solar Energy System Eligibility

To be eligible for the Federal Solar Tax Credit, you must install a solar energy system that provides electricity for a residence, such as solar water heaters or a solar photovoltaic (PV) system. Since solar water heatersuse the sun’s thermal energy to heat water and solar photovoltaic (PV) systems convert the sun’s light energy into electricity, both systems will qualify for the Federal Solar Tax Credit.

Solar Water Heaters

Solar water heaters are a cost-effective way to generate hot water for your home. Offered in various designs that include a solar collector and storage tank, solar water heaters use the sun’s thermal energy to heat your home’s water.

Solar Panels (Photovoltaic Systems)

Solar panels, also known as photovoltaic (PV) panels, are flat constructions resembling windows that convert light from the sun (in the form of energy particles known as photons) into electricity. Offered in three types such as monocrystalline, polycrystalline and thin-film, solar panels can significantly reduce your electricity bill.

How to Claim Solar Tax Credit

Following your solar power installation, you can only claim the tax credit once. Therefore, you should speak to your solar provider to supply the proper documentation and instructions, which include the following:

1. FileIRS Form 5695as part of your tax return
2. In Part I, calculate the credit of the tax form
3. File your solar system as “qualified solar electric property costs”
4. On line 1, enter your project’s total costs as written in your solar contract
5. On lines 6a and 6b, complete the calculations
6. On line 14, calculate any tax liability limitations using the IRS’sResidential Energy Efficient Property Credit Limit Worksheet
7. On lines 15 and 16, complete the calculations
8. On line 5, enter the exact figure from line 15 on your Schedule 3 (Form 1040)

You can also carry over any unused amount remaining on your tax credit that you could not claim in a single tax year.

When Should I Go Solar?

The new law is currently in effect and will be in some capacity until the end of 2034. From nearly every angle, going solar now is more appealing than ever. So, is now the time to leap, or should you wait for an even better deal? The answer may not be as cut-and-dried as it appears. There are several factors to consider when deciding if a solar PV system is worth it to you now, later or never.

• Solar energy technology is better, less expensive and more efficient than ever.
• Even with federal and state tax credits and utility company rebates, the average system still takes six to 10 years to pay for itself through lower energy costs.
• The tax credit reduces the amount of income tax you’ll owe. It’s not an immediate discount on products and installation. You’re still responsible for the upfront cost of the system.
• Several states offer some form of net metering that essentially pays you for creating more energy than you use with a PV system. These programs are being contested in some areas and may not last indefinitely.
• Other components of the same law offer incentives to industries and manufacturers of solar and related products. The effect these incentives will have on overall pricing over the next several years is yet to be determined.
• Other solar energy options, such as purchasing an interest in an off-site solar project also include tax credit benefits and could be another choice beyond installing your own system.

How Do Other Incentives Affect the Federal Solar Tax Credit?

Solar customers can take advantage of incentives to reduce the total installation costs of their system, from electric utility rebates and renewable electric certificates to state government rebates and state tax credits. These reductions will affect the amount you report to the IRS on your tax return.

State Solar Incentives

Several states and Puerto Rico offer solar incentives in addition to the federal ITC to encourage homeowners to install solar. Each state has different incentives in place, but there are a few common ones: tax credits, rebates and renewable energy certificates. States with a high number of solar incentives include California, Texas, Minnesota and New York.

Each state has its own set of solar incentives that vary significantly. Different agencies offer different solar financial incentives, so talk to your installer and consult the Database of State Incentives for Renewables & Efficiency for specifics.

State Tax Credits

State tax credits work in the same way that the federal ITC does, but for your state taxes. Exact amounts vary significantly from state to state, and they generally don’t reduce your federal tax credits.

State Government Rebates

Some states offer upfront rebates for installing a solar power system. They are typically only available for a limited time while funds are available, so research rebates in your state to get in on the incentive before it runs out. A state government rebate can reduce your solar costs by 10% to 20%.

Solar Renewable Energy Certificate

A Solar Renewable Energy Certificate (SREC), sometimes referred to as a Solar Renewable Energy Credit, is another type of state-level solar incentive. After you install your solar power system and register it with the appropriate state authorities, they will track your system’s energy production and periodically offer you SRECs as a benefit. You can sell your SREC to your local energy utility (or another buyer) to provide payment that’s typically considered taxable income.

Other Incentives

Local Utility Rebates

Local utilities often provide some financial incentives to encourage local homeowners to install solar power systems. Some offer rebates on energy bills based on how much energy the system produces, while others provide one-time subsidies to install a solar power system.

Incentives that pay you a per kilowatt-hour credit for the power that your system produces are known as PBIs, or performance-based incentives.

Subsidized Loans

Your state, local utility, or another non-government organization may offer subsidized loans to help you finance the purchase of your solar panel system. Before you purchase your system, discuss options for subsidized loans with an installer in your area—they’re likely to know every solar program available locally.

Tax Exemptions

In addition to tax credits, you may be eligible for certain tax exemptions after you install a solar system. Despite the fact that these systems will increase your property value, some states and municipalities will not include them when assessing property taxes, which means your property tax bill will not go up with solar installation.

Some states also have programs to ensure all purchases of solar power system components are exempt from state sales taxes, which could save you hundreds of dollars when you go to install your system.

Bottom Line

Combining these various solar tax credits and other financial incentives can save you money on your solar power system installation. While installing one requires a significant amount of money upfront, these programs will greatly reduce the system’s overall cost.