How does the federal solar tax credit work?

With tax season fast approaching, you may be thinking about what tax incentives are available for residential solar. One of the best tax credits to take advantage of right now is the Federal Solar Investment Tax Credit (ITC), otherwise known as the federal solar income tax credit or federal residential energy credit. Here’s what you need to know about how the federal solar tax credit works.

Disclaimer: Brooklyn SolarWorks are not financial professionals. As much as we’ll always strive to provide our customers with the most accurate information regarding solar tax incentives, we are not tax experts. Please consult your tax advisor for guidance on filing for credits with respect to your specific circumstances.

What is the federal solar tax credit?

The federal solar income tax credit allows homeowners to deduct up to 30% of their solar system installation costs from their federal income tax. This is a dollar-for-dollar reduction in the amount of income tax you owe to the federal government. If the credit exceeds a taxpayer’s single year tax liability, they can divide the credit over multiple years. This credit is available for residential and commercial installations, but each has different guidelines.

The solar ITC was established by the federal government in the Energy Policy Act of 2005, and has been instrumental in incentivizing residential solar. In fact, SEIA estimates that the ITC has expanded the solar industry by 10,000 percent. Additionally, a study by SolarReviews.com found that the ITC is the single most important financial incentive for U.S. homeowners to invest in solar. Because of its popularity, it has been extended multiple times over the past 15 years.

Most recently, the 30% federal tax credit was extended in August 2022 for an additional 10 years. The credit will then step down to 26% in 2033, and 22% in 2034.

Is there a difference between the federal solar tax credit and the solar investment tax credit (ITC)?

You may see “federal solar tax credit” and “solar investment tax credit” – or a combination of the two – in different places. “Investment Tax Credit” is the given name of this credit, but some may refer to it as the “federal solar tax credit” in shorthand. The form that you’ll file to claim this credit refers to it as the Residential Energy credit. For all intents and purposes, these are all the same.

How do I know if I’m eligible to claim the federal investment tax credit for solar?

Pay Income Taxes

First and foremost, in order to claim any income tax credit with the federal government, you must be paying income taxes.

Ownership of Solar System

The most important criteria for determining your eligibility for the solar ITC is ownership of the system. You must own your system outright in order to claim this credit. You are not eligible if you lease your solar system or enter into a power purchase agreement.

Installation Location and Timeline

The solar system that you claim should be installed on either your primary or secondary home in the U.S. A “home” is defined by the IRS as “where you lived” during the tax year – this can be a house, houseboat, mobile home, co-op, condo, or other form of housing.

You will file for this credit when you do your taxes for the year your system was installed. For example, if your system is installed in 2022, you will file for the credit when you do your 2022 taxes.

Income Bracket

You may wonder if this credit only applies to a certain income level. It does not! Taxpayers from all tax brackets can claim the ITC on their federal taxes.

Qualifying Expenses

In past iterations of the ITC, there has been some gray area as to what expenses are covered by the credit. However, the IRS currently has a clear definition of qualifying expenses: 

“You may be able to take a credit of 26%* of your costs of qualified solar electric property…Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home.

…Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States.”

By this definition, the following expenses are covered:

• The cost of the system, including panels, racking, inverters, and other equipment
• Labor costs, including installation and permitting and inspection fees
• Solar batteries
• Any applicable sales taxes

Despite a clear definition, there is still some disagreement when it comes to roof replacement costs. Some solar installers may tell you that you can replace your roof in tandem with installing solar panels and claim the roof replacement costs under the ITC. It is our interpretation that roof replacement is not a qualifying expense.

In its definition of qualifying expenses pictured below, the IRS clearly states that “structural components such as a roof’s decking or rafters that serve only a roofing or structural function” do not qualify for the credit. You can find the highlighted section of the tax code here.

*This quote was taken from the 2021 tax code, when the tax credit only accounted for 26% of installation costs. As of August 2022, it was boosted to 30%.

When can I claim the solar tax credit?

You are eligible to claim the federal solar tax credit for the year in which your system was installed. If your system is installed in 2022, you’ll claim the credit when filing your 2022 taxes. If you do not have enough tax liability to use the credit in just one year, you can divide the credit over multiple years.

How much is the solar tax credit?

The federal solar tax credit covers 30% of your installation costs. In 2033, the credit will drop to 26% and then 22% in 2034.

How to Claim the Federal Solar Tax Credit

To claim this credit, you’ll need to file IRS Form 5695 for Residential Energy Credits in addition to Form 1040 and any others applicable to your situation. This form calculates tax credits for a variety of energy efficient home improvements, including residential renewable energy. 

There are essentially three main steps to take when filing for the federal solar tax credit:

1. Determine your total tax liability for the year. This will tell you whether or not you can use the entire credit in one year or if you’ll be able to carry it forward.
2. Complete Form 5695, following the instructions to calculate your tax credit amount. Completion of this form will also tell you how much of the credit you’ll be able to carryover if applicable.
3. Add the result of Form 5695 to Schedule 3 of your Form 1040.

Though we strive to provide the most accurate tax information to the best of our knowledge, we are not tax experts. Please consult your tax advisor for more guidance on filing for the ITC.

Using the Federal Solar Tax Credit with Other Incentives

Along with the ITC, there are several New York State solar incentives available. In addition to the federal solar tax credit, NYC solar customers can file for the following state and city solar credits and rebates:

• NYC Property Tax Abatement
• New York State Solar Income Tax Credit
• New York State Solar Rebate
• NYS Historic Homeownership Rehabilitation Tax Credit (dependent upon your neighborhood)

When combined with the ITC, these incentives can cover up to 70 percent of the cost of your solar system.

Other Federal Solar Tax Credit FAQs

Can I claim the federal solar tax credit more than once?

Yes. If your total tax liability from the initial year you filed for the ITC was less than the credit amount, you can claim any carryover credits the following year. The credit can be used over multiple years depending on your tax liability.

Is the solar tax credit refundable?

No, the ITC is a nonrefundable credit. If the credit exceeds your tax liability for the year, the difference won’t be added to your tax refund. Instead, you can use the excess credit amount on the following year’s income taxes.

Can I claim the solar tax credit on a rental property?

Generally, no. The residential solar ITC applies to the home that you live in. 

If you live in your rental property for a portion of the year, you can claim the credit – but you will have to reduce the credit amount to reflect the amount of time you lived there. For example, if you lived in your rental property for three months, you can claim 25% of the credit (to reflect the 25% of the year that you lived there).

Is the federal solar tax credit expiring?

The credit will be available until at least 2034. In August 2022, the federal government extended the 30% credit for 10 years, after which the credit will begin to step down. In 2033, it will be 26%, then 22% in 2034.

The Federal Solar Tax Credit for Homeowners in New York City

The federal solar tax credit is just one of several excellent financial incentives available to New Yorkers. When combined with state and local tax incentives and rebates, up to 70 percent of the cost of your solar system is covered. Like any home improvement project, solar is a big investment – but unlike an addition to your house, for example, the financial benefits of solar are available to you almost immediately.

Though the initial price tag may seem out of reach, a solar installation in NYC is more affordable than you think.

If you’ve been considering solar, now is the time to flip the switch. Take advantage of solar tax incentives at their peak – schedule a free consultation to get started today.