How Solar Tax Credits and Incentives Work

You only need to look at your monthly utility bills to know that energy costs are rising in 2022. According to the United States Energy Information Agency, the average price of electricity in the U.S. increased by 5.5% in the past year, from 13.7 cents per kWh in 2021 to 14.45 cents per kWh in 2022.

As you make larger monthly electricity payments to the power company, you may wonder if the time has come to join the many American households relying on solar panels to help lower their energy costs (read our guide on the cost of going solar ). According to the Solar Energy Industries Association, the U.S. now has installed enough solar capacity to power 22 million homes. This growth has been fueled by declining costs of solar technology, increasing demand for renewable energy, and incentive-driven policies such as the federal tax credit for homeowners who install residential solar power. This credit has been increased to 30% under the Inflation Reduction Act, (IRA) which was signed into law in August 2022.

The federal solar tax credit can help you save money

If you are thinking of going solar, you owe it to yourself to understand the federal solar tax credit and how it can help you save money when you file your annual taxes. And while this article can help you get up to speed, be sure to contact a qualified tax professional when it comes to applying the credit to your taxes.

How does the solar panel federal tax credit work?

The federal government created the first solar tax credit in 2005 through the Energy Policy Act. Initially set to expire at the end of 2007, the credit has been extended by Congress multiple times. With the passage of the IRA, it’s now extended through 2034.

A credit reduces the income tax you owe to the federal government. Under IRA rules, homeowners who go solar can claim a tax credit equivalent to 30% of the cost of a system installed in 2022 through 2032, 30% of the cost of a system installed in 2033, and 22% of the cost of a system installed in 2034.

So, if you install solar panels on your roof this year at a cost of $17,500, you may be eligible for a $5,250 credit against your tax liability for 2022:

This would lower the cost of your solar system to $12,250.

What expenses are eligible for the federal solar tax credit?

The solar tax credit applies to the cost of your solar equipment, professional installation and qualified expenses. Eligible expenses include the following:
• Consulting, electrician, and engineering fees
• Labor by a professional contractor, including preparation, permits, solar installation, and inspection fees (Note, that if you choose to install the system yourself, you cannot claim your labor as an eligible expense)
• Wiring, inverters, and mounting equipment such as nuts, bolts, brackets, etc.
• Rented equipment such as tools and scaffolding
• Freight and shipping costs
• Batteries that are charged exclusively by the solar panels
• Sales tax on eligible expenses

Solar tax credit eligibility

According to a 2021 publication by the U.S. Department of Energy, you may be eligible for the federal solar tax credit if you meet the following criteria:
• The solar system is located at your primary or secondary residence in the U.S.
• You own the solar system (it’s not leased).
• The solar system is new or being used for the first time.

How to claim the federal solar tax credit

Claiming the solar tax credit starts as soon as you begin paying for items or services related to your installation. Be sure to keep all receipts related to the eligible expenses listed above.

At tax time, get a copy of IRS Form 5696, Residential Energy Credits. Have your saved receipts handy, and follow the instructions on the form to calculate your credit. The form includes instructions on where to add the credit to your Form 1040.

The page linked above includes detailed instructions for filling out Form 5696. Again, consider working with a qualified tax professional to calculate the credit and file your income taxes.

What about state solar tax credits?

Currently, 20 U.S. states offer either a tax credit or a rebate for installing residential solar panels, according to Sunrun.

A state rebate is a one-time payment from your state for installing solar. This affects neither your state nor federal taxes.

A state tax credit works similarly to a federal credit. You can reduce your state tax liability by a certain percentage of your eligible costs of going solar. Note, however, that because this credit will reduce the state tax you owe, your federal taxable income (which deducts the taxes you pay to the state) will be higher.

Going solar is a significant investment, and AmeriSave can help!

Even with federal and state solar tax credits, buying a solar energy system for your home can be an expensive investment if you’re paying out of pocket. You owe it to yourself and your family to understand your needs and options in order to chart the best path forward.

The good news? AmeriSave can help. Our experts can help you decide if solar is right for your home, connect you with a trusted professional installer in your area, and even offer some great loan options to help you pay for it all. Contact an AmeriSave solar expert to learn more.