What is the Federal Solar Tax Credit?
Solar Panel Installation Tax Credit
First, let’s take a short walk down memory lane. The Solar Investment Tax Credit (commonly called the ITC) was first offered via the Energy Policy Act of 2005. Thanks to its popularity and its contribution toward renewable energy goals, the ITC has been extended multiple times. While it was originally set to expire in 2007, the current federal solar tax credit extension is set to expire in 2024. Homeowners can use the federal tax credit for battery storage, installing new systems, and more.
A quick but necessary disclaimer: we’re solar experts, not tax accountants! We do our best to give accurate advice, but please check with a professional to be sure you’re eligible to claim the credit.
A tax credit is a dollar-for-dollar reduction of the income tax you owe. $1 credit = $1 less you pay in taxes. It’s that simple. If you spend $10,000 on your system, you owe $2,600 less in taxes the following year.
It’s important to note that a credit is different than a refund, because you have to owe taxes to claim the incentive. But since most people owe taxes, most people end up being eligible for the Federal Solar Tax Credit.
How Does the Federal Solar Tax Credit Work
......and How Much Will I Save?
Right now, the Solar Investment Tax Credit (ITC) is worth 30% of your total system cost. This includes the value of parts and contractor fees for the installation.
As mentioned before, if it costs $10,000 to buy and install your system, you would be owed a $3,000 credit.
You are only allowed to claim the federal solar tax credit if you own your system. This is why we’re strongly opposed to solar leasing if you can avoid it. If another company leases you the system, they still own the equipment, so they get to claim the incentives.
You’ll still get the benefits of cheap, renewable energy if you lease. But missing out on the tax credit is a huge blow to getting a positive ROI from your system.
It makes more sense to take advantage of solar financing instead. You’re still on the hook for a loan, but you retain rights to the incentives to claim your solar panel federal tax credit that help make solar such a sound investment.
Solar panels installation, Electrical services and air conditioning services,
How Long Will the Federal Solar Tax Credit Stay in Effect?
As the saying goes, “all good things must come to an end.” And the solar tax credit is no exception.
However, the federal government recently extended the federal solar tax credit as part of a federal spending package passed in December 2020.
Under this new bill, residential, commercial, industrial, and utility-scale solar projects that begin in 2021 and 2023 will be eligible for 30% tax credit.
You can claim the solar panel tax deduction in the same year you complete the installation, so you can get the full 30% if you install your system before the end of the year 2025.
The tax credit plays a major part in the return on investment you see from going solar. Grid-tie systems pay for themselves either way, but claiming the credit allows you to realize more immediate savings.
How do I claim the Federal Tax Credit?
So let’s get to the good stuff. What do you need to do to actually get your hands on this money?
Our first bit of advice is to keep all your receipts from the start of your solar installation project. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. The more you spend on your project, the larger your credit – so make sure to keep track of everything!
Here are some of the expenses that you are allowed to claim:
- Solar equipment
- Freight shipping costs
- Solar consulting fees
- Professional installer fees
- Electrician fees
- Engineer fees
- Tools bought or rented
- Wiring, screws, bolts, nails, etc.
- Equipment purchased or rented (scaffolding or a man-lift, for example)
- Permitting fees
- Permitting service costs
How to File Form 5695 With Your 1040 Individual Tax Return
Once you’ve spent the money, you’ll need to prove it to the government to claim your solar tax credit. For that, you need IRS Form 5695 to claim the residential energy credit.
If you file your own taxes, use the steps below to claim your Residential Renewable Energy Tax Credit.
- Gather all your expense receipts and put them in a safe place.
- Confirm you are eligible for the tax credit. (If you own the system and owe taxes, you’re probably eligible. Check with a tax specialist if you’re not sure.)
- Complete IRS Form 5695 to add up your renewable energy credits.
- Add your renewable energy credit information to your typical form 1040.
That’s it!
We hope this serves as a good introduction to the Federal Solar Tax Credit and helps you navigate the research process.
If you need help from a solar designer, get in touch with us for a consultation. We’re happy to walk you through any questions you may have.