What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC, though is different from the ITC offered to businesses that own solar systems.
What is the federal solar tax credit?
The federal residential solar energy credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar photovoltaic (PV) system. (Other types of renewable energy are also eligible for similar credits but are beyond the scope of this guidance.)
The system must be placed in service during the tax year and generate electricity for a home located in the United States. There is no bright-line test from the IRS on what constitutes “placed in service,” but the IRS has equated it with completed installation.
In December 2020, Congress passed an extension of the ITC, which provides a 26% tax credit for systems installed in 2020-2022, and 22% for systems installed in 2023. (Systems installed before December 31, 2019 were eligible for a 30% tax credit.) The tax credit expires starting in 2024 unless Congress renews it.
There is no maximum amount that can be claimed.
Am I eligible to claim the federal solar tax credit?
You might be eligible for this tax credit if you meet all of the following criteria:
- Your solar PV system was installed between January 1, 2006, and December 31, 2023.
- The solar PV system is located at your primary or secondary residence in the United States, or for an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption. The IRS has permitted a taxpayer to claim a section 25D tax credit for the purchase of a portion of a community solar project.
- You own the solar PV system i.e you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity generated by a system you do not own
- The solar PV system is new or being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment
What expenses are included?
The following expenses are included:
- Solar PV panels or PV cells used to power an attic fan (but not the fan itself)
- Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed (however, the energy storage devices are still subject to the installation date requirements)
- Sales taxes on eligible expenses
How do other incentives I receive affect the federal tax credit?
For current information on incentives, including incentive-specific contact information, visit the Database of State Incentives for Renewables and Efficiency website.
REBATE FROM MY ELECTRIC UTILITY TO INSTALL SOLAR
Under most circumstances, subsidies provided by your utility to you to install a solar PV system are excluded from income taxes through an exemption in federal law. When this is the case, the utility rebate for installing solar is subtracted from your system costs before you calculate your tax credit. For example, if your solar PV system was installed before December 31, 2022, cost $18,000, and your utility gave you a one-time rebate of $1,000 for installing the system, your tax credit would be calculated as follows:
0.26 * ($18,000 – $1,000) = $4,420
PAYMENT FOR RENEWABLE ENERGY CERTIFICATES
When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes of the electricity generated (either upfront or over time), the payment likely will be considered taxable income. If that is the case, the payment will increase your gross income, but it will not reduce the federal solar tax credit.
REBATE FROM MY STATE GOVERNMENT
Unlike utility rebates, rebates from state governments generally do not reduce your federal tax credit. For example, if your solar PV system was installed before December 31, 2022, installation costs totaled $18,000, and your state government gave you a one-time rebate of $1,000 for installing the system, your federal tax credit would be calculated as follows:
0.26 * $18,000 = $4,680
STATE TAX CREDIT
State tax credits for installing solar PV generally do not reduce federal tax credits—and vice versa. However, when you receive a state tax credit, the taxable income you report on your federal taxes will be higher than it otherwise would have been because you now have less state income tax to deduct. The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax deduction, which may impact whether a state tax credit impacts federal taxable income. The end result of claiming a state tax credit is that the amount of the state tax credit is effectively taxed at the federal tax level.
For example, the net percentage reduction for a homeowner in New York who claims both the 25% state tax credit and the 26% federal tax credit for an $18,000 system is calculated as follows, assuming a federal income tax rate of 22%:
0.26 + (1 – 0.22) * (0.25) = 45.5%
Note that because reducing state income taxes increases federal income taxes paid, the two tax credits are not additive (i.e., not 25% + 26% = 51%). For an $18,000 system, the total cost reduction in this example would be:
[$18,000 * 0.26] + [$18,000 * (1 – 0.22) * (0.25)] = $4,680 + $3,510 = $8,190
Can I claim the credit, assuming I meet all requirements, if:
I AM NOT A HOMEOWNER?
I INSTALLED SOLAR PV ON MY VACATION HOME IN THE UNITED STATES?
I AM NOT CONNECTED TO THE ELECTRIC GRID?
THE SOLAR PV PANELS ARE ON MY PROPERTY BUT NOT ON MY ROOF?
I HAVE A HOME OFFICE (OR MY RESIDENCE IS ALSO USED FOR A COMMERCIAL PURPOSE)?
I FINANCED MY SOLAR PV SYSTEM INSTEAD OF PAYING FOR IT UPFRONT?
I BOUGHT SOLAR PANELS BUT HAVE NOT INSTALLED THEM YET?
I PARTICIPATE IN AN OFF-SITE COMMUNITY SOLAR PROGRAM?