All you need to know about the Solar Tax Credit
Using solar energy to power your home benefits the environment and your wallet. A powerful financial incentive called the solar tax credit has been instrumental in making solar energy a viable option for homeowners nationwide. Here’s everything you need to know about the tax credit for solar energy and why 2023 could be a great year to invest in solar panels.
What is the Residential Clean Energy Credit?
The Residential Clean Energy Credit, also known as the federal solar tax credit, is a financial incentive the US government is offering to encourage homeowners to install solar energy systems. The incentive reduces your federal income tax liability based on the amount you spend to install a solar power system in your home.
The Residential Clean Energy Credit is an essential component of the nation’s gradual shift toward clean, renewable energy, with the added bonus of significant monetary savings for participating homeowners. No maximum cap has been set on the amount you can claim, so the more you invest in solar energy, the more you can save on your taxes.
How Does the Solar Tax Credit Work?
A tax credit is a dollar-for-dollar reduction in how much income tax you pay, which is much more valuable than a tax deduction that simply reduces the amount of income subject to tax. The federal solar tax credit is essentially like receiving a percent-off coupon to lower the cost of installing a solar energy system, deducted directly from your federal income taxes. This includes the cost of the solar panels themselves, along with associated installation costs, such as labor, assembly, auxiliary equipment, inspections, and sales tax.
The federal solar tax credit is currently set at 30% but will decrease in the coming years. This step-down was originally scheduled to begin in 2022, but Congress passed an extension of the Investment Tax Credit (ITC) as part of the COVID relief bill to keep it at 30% through 2032. The tax credit expires in 2035 unless Congress renews it again.
Here’s a helpful example: If you install a solar energy system that costs $20,000, and the federal solar tax credit rate is 30%, you are eligible to receive a $6,000 reduction on your federal income tax bill. If your tax liability is less than your tax credit in a given year, you can roll over the balance to the following year.
The Value of the Solar Tax Credit
Considering the rising costs of traditional energy sources, solar is an investment that promises both short-term and long-term returns. By installing solar panels that typically last 25 to 30 years, you reduce your reliance on grid-produced energy and enjoy lower electricity bills for decades to come. Adding the solar tax credit to these inherent savings significantly reduces the upfront cost of switching to solar, shortening your payback period by a few years.
How to Qualify for the Solar Panel Tax Credit
US taxpayers of any income level can take advantage of the federal solar tax credit. You can use it whether you itemize your taxes or take the standard deduction. Still, your eligibility depends on several factors:
- You must own the home where you plan to install the panels.
- The solar energy system must be installed at your primary or secondary residence in the United States (investment and offshore properties do not qualify).
- You must own the solar panels (leased panels do not qualify). Alternatively, being a tenant-stakeholder in an offsite power-purchasing cooperative or owning a portion of a community-owned solar system may qualify you if the electricity is credited against and does not exceed your home’s electricity consumption.
- Your solar panel system must be installed within the same tax year that you claim the credit (anytime between 2017 and 2034).
- The system must meet the current standards and certifications in place.
How to Claim the Solar Panel Tax Credit
Claiming the solar panel tax credit requires some paperwork. First, fill out IRS Form 5695, titled “Residential Energy Credits.” Then, include the final figure from this form on IRS Form 1040 when you file your taxes. Keep all receipts related to your solar installation, along with the manufacturer’s certification statement, so you can prove your claim.
Switch to Solar with Help from Kapital Electric, Inc.
With the full 30% solar tax credit available this year, 2023 is a great time to switch to clean, renewable energy. Navigating the specifics may seem overwhelming, but that’s where Kapital Electric, Inc. steps in. With over 25 years of experience installing residential solar panels, we are well-equipped to help Chicago homeowners go solar. Our expert installers understand the ins and outs of the federal solar tax credit and can assist you throughout the process.
If you’re ready to harness the sun’s power and start saving on your electricity bills, please contact us at (630) 833-2389. Together, we can pave the way for a cleaner, brighter, and more sustainable future.