The federal solar tax credit is back to 30%, and there’s never been a better time to install solar and start saving on energy costs. Contact online >>
The federal solar tax credit is back to 30%, and there’s never been a better time to install solar and start saving on energy costs.
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law, immediately activating the Residential Clean Energy Credit for solar, battery storage, and more.
Also known as the Investment Tax Credit (ITC), this solar incentive was at 26% in 2022 and scheduled to step down to 22% in 2023 before going away entirely for residential solar in 2024. However, with the IRA in effect, the tax credit is back to 30% until 2032… or until a future administration repeals it.
In this article, we’ll explore the new and improved federal solar tax credit and show you how step-by-step to claim it.
The Residential Clean Energy Credit (formerly known as the ITC) is a tax credit worth 30% of the gross cost of your solar project (parts, labor — the whole chalupa) with no maximum incentive amount.
Even though it’s commonly known as the solar tax credit, the Residential Clean Energy Credit also applies to battery storage, wind, geothermal heat pump, and fuel cell expenditures.
So if your all-in solar cost is $25,000, your federal solar tax credit would be worth $7,500. If you spend $75,000 on solar and battery, your tax credit would be worth $22,500.
The only requirements to use this incentive are:
We’ll cover how to claim your federal solar tax credit later on. First, let’s see how the federal solar tax credit got to 30% in 2022.
Since its creation in 2005, the solar tax credit has gone through several updates and wore several nametags. So, for the sake of simplicity, we’ll just refer to it as the “federal solar tax credit.”
The last time it was at 30% was 2019. Then it stepped down to 26% for 2020-2022. It was scheduled to step down to 22% in 2023 before expiring for residential solar customers in 2024.
Here’s the new and improved federal solar tax credit step-down schedule:
As you can see, the new schedule has the credit at 30% until it steps down to 26% in 2033 and 22% in 2034. And the 30% credit applies retroactively to solar and battery projects installed in 2022.
This article is for informational purposes only and does not constitute tax advice. Please consult a licensed tax professional with questions about claiming the Residential Clean Energy Credit.
Since the federal solar tax credit is applied to your solar array’s gross system cost, the amount you receive is dependent on the amount of solar you’re purchasing: bigger system, bigger credit.
Here’s a quick example of the difference in credits in 2021 and 2022 for a 9 kW solar array at an average cost of $27,000.
That’s a savings difference of $1,080, equal to a year’s worth of $90 utility bills.
The equation for figuring out how much your solar tax credit is worth is simple.
So if your project costs $30,000, your tax credit will be worth $9,000 ($30,000 x 0.30 = $9.000).
The gross system cost may include improvements needed to facilitate the solar installation, such as electrical box upgrades. However, it’s best to speak to your tax advisor about your unique circumstances.
The credit is a dollar-for-dollar income tax reduction. This means that the credit reduces the amount of tax that you owe. It also means that you have to pay and file taxes in the same tax year in order to receive the credit.
Now that we know how to calculate your solar tax credit, let’s go over how to claim it.
To claim the federal solar tax credit you will need to file an IRS Form 5695 for the tax year that your project was deemed operational, usually by a city inspector.
So, if your solar panels passed a city inspection on August 14, 2023, then you would claim your Residential Clean Energy Credit when you file your 2023 taxes (probably in early 2024).
We''ll walk you through the basic process of filing for the federal solar tax credit, but we recommend talking to a tax professional to make sure you''re not missing anything.
You will need four IRS tax forms (plus their instructions) to file for your solar panel tax credit.
The following is a fictional scenario to be used for example purposes only. Consult a licensed tax professional with questions.
Let''s go through the basics of claiming a federal solar tax credit using a fictional $30,000 expenditure on a solar system.
Begin by filing your taxes as you normally would. Tally your income, claim dependents, deduct your charitable donations — all that fun stuff.
Your solar tax credit comes into play on Line 5 of Schedule 3 (Form 1040). This form is for claiming additional credits and payments, including residential energy credits.
When you hit this point, it''s time to switch to Form 5695 to calculate your residential energy credit amount.
We’ve modified Form 5695 below to show an example scenario for a $30,000 solar purchase and the 30% tax credit available from 2022-2032.
We’ll assume you only installed solar equipment, so we can skip lines 2-5 and keep it simple.
Input the gross cost of your solar installation in Line 1, then multiply it by 0.30 in Line 6b to find your credit amount. In this scenario, it''s $9,000.
Carry this figure down to Line 13. Then use the Residential Energy Efficient Property Credit Limit Worksheet (Page 4 of the form 5695 Instructions) to calculate your tax liability for Line 14.
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