Solar Energy Investment Tax Credit [What Is It & How Does It Affect You?]

The United States Congress recently passed legislation to extend the federal solar investment tax credit to 2035 and raise the credit rate from 26% to 30%. If you installed a solar system in your home or office building since the start of the 2022 tax year, you’re likely eligible to receive this benefit.

The United States can potentially adapt solar energy as its primary power source. While global gas prices are volatile, there is no better time to switch to solar than now. How does the solar tax credit work? Continue reading.

What is the Solar Tax Credit?

A tax credit is a deduction you can take out of your federal income tax relating to a specific purpose. Regarding the newest tax credits for solar energy, American citizens who have installed solar panels in their homes since January 24, 2022, are likely eligible for a 30% credit on their annual federal income tax. 

Tax Credit Rate Year-by-Year:

• 2022-2032: 30%
• 2033: 26%
• 2034: 22%
• 2035 and onward: 0%, unless the tax credit period is extended

Congress extended the solar tax credit for 13 more years through the August 2022 Inflation Reduction Act. The tax credit will apply retroactively to anyone who installed solar panels in the 2022 tax year. Individuals who have installed solar systems since 2017 may also be eligible for tax credits, depending on the system installed and if the system was declared in the past.

The tax credit only applies to the main property and cannot be used more than once per property. If you lease or rent solar panels, you’re ineligible to receive this tax deduction. The solar investment tax credit doesn’t apply to old units, but communities that invest in or purchase an off-site community solar project may be eligible.

How Do You Claim the Solar Energy Tax Credits?

People who purchased solar for their home or commercial property through cash or a loan can file a claim when submitting their federal income statements. Fill out and attach Form 5695 to your income tax bill, so the IRS knows you’re paying your fall tax bill.

Completing Form 5695 requires solar installation receipts and your income tax Form 1040.

How Does the Solar Tax Credit Affect Californians and Floridians?

Florida and California are the two states with the greatest solar potential for home and commercial use. The average cost of a home solar system in Florida and California is $9,361 and $10,101, respectively. Using these averages, you’d save $2,790 in Florida and $3,030 in California on your income tax. 

How Does the Solar Tax Credit Work If I Don’t Owe Taxes?

Because the solar tax credit isn’t a tax rebate, you don’t get paid for installing solar even if you owe no taxes. However, the solar tax credit rolls over to the following year and can be written off for five years or until you reach the credit limit.

How Does the Solar Investment Tax Credit Work if I Get a Refund?

The solar investment tax credit is actually nonrefundable, which means you don’t get money back if your deduction is greater than your tax liability. This tax credit is not a one-time credit, and the remaining amount can be used the following tax year.

So, if you have $3,500 in tax credits for solar energy and a tax liability of $2,500 in 2022, the government will credit you $1,000 for the 2023 tax season.

How Much Money Do You Get Back from Taxes from Solar Panels?

The amount of money you get back from installing a solar system depends on whether all expenses for the solar system qualify for the tax credit. 

Expenses that qualify:

• Solar panels (for first-time installations)
• Solar inverter, wiring, mounting gear, and solar storage
• Installation and inspection
• Sales tax 

Homeowners can deduct 30% of the value of those expenses from their income taxes. If you owe $25,000 in income taxes and install a $12,000 solar system from 2022 to 2032, you’ll owe $21,400 in income taxes. 

How Many Years Can You Claim the Energy Tax Credit?

The rollover period for the energy tax credit is five years. 

Other Solar Incentive Programs in California and Florida

California and Florida are states with the greatest demand for solar energy. Both state governments and local utility companies offer extra incentives to motivate people to install solar panels.

Extra Ways to Save on Solar in California:

• Self-Generation Incentive Program (SGIP)
• Solar Energy System Property Tax Exclusion
• Single-Family Affordable Solar Housing (SASH) Program
• Utility Company Rebates in Sacramento and San Francisco
• Net Metering

Extra Ways to Save on Solar in Florida:

• Home Solar System Sales Tax Exemption
• Net Metering

Each program has unique requirements, and not everyone is eligible. Contact a tax professional or local government for more information to see how these programs overlap.

Ready to Make the Switch to Solar?

There’s no better time than now to install solar, seeing that the federal solar investment tax credit was just extended until 2035. If you live in Florida or California and are looking to install a home solar system, contact Current Home for a free quote.