Federal tax credit for solar energy

What is the Residential Clean Energy Credit?

In an effort to encourage Americans to use solar power, the US government offers tax credits for solar systems. The Inflation Reduction Act renamed and extended the existing solar tax credit credit through 2034 for solar system installations on residential property. It also increased the credit’s value. Let's take a closer look at some of the benefits of the solar tax credit and how you can claim it.

How does the federal solar tax credit work?

When you purchase solar equipment for your home and have tax liability, you generally can claim a solar tax credit to lower your tax bill. The Residential Clean Energy Credit is non-refundable meaning that it can offset your income tax liability dollar-for-dollar, but any excess credit won’t be refunded. If the credit exceeds your tax liability for the year, you can "roll over" the unused portion to future years so long as the credit remains in effect.

There are no income limits on the solar tax credit, so all individual taxpayers are eligible to claim the credit on qualifying solar energy equipment investments made to their homes within the United States.

If you purchase power generated by solar equipment through a lease agreement or power purchase agreement, you aren’t the system owner and thus can’t claim the credit on your taxes.

What costs are covered by the solar tax credit?

The qualified energy-saving equipment covered by the Residential Clean Energy Credit includes:

• Solar-powered equipment that generates electricity or heats water

• Solar power storage equipment for 2022, but a capacity of at least 3 kilowatt hours (kWh) is required beginning in 2023

• Qualifying installation and labor costs

The tax credit doesn't apply for systems that you lease or for systems that you use to heat a swimming pool or hot tub.

Qualified homes

To qualify for the solar credit, the energy-saving improvements need to be made to your US residence, which can include your:

• House

• Houseboat

• Mobile home

• Cooperative apartment

• Condominium

• Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards

How do I qualify for the solar tax credit?

To qualify for claiming the solar tax credit on your tax return, you’ll first need to meet some eligibility criteria:

• Your solar equipment needs to be installed between January 1, 2017, and December 31, 2034.

• The solar equipment must be located at a residence of yours within the United States.

• The solar equipment is new or being used for the first time (meets the original installation requirement for claiming the credit).

From there, you’ll need to meet one of these two requirements to claim the credit:

• Purchase the solar system with cash or through some form of financing that isn’t a lease or an agreement to pay a solar company for electricity generated by the system.

• Purchase an interest in a community solar project that is separate from your residential property, if the electricity generated is credited against, and doesn't exceed, your home’s electricity consumption.

What are the benefits of going solar?

Tapping the sun for power offers several benefits. For example, using solar power rather than fossil fuels to produce electricity:

• Reduces pollution

• Reduces your individual carbon footprint

• Can lower the cost of powering your home

But since the installation of solar power equipment can be costly, the federal solar tax credit can help you offset some of the costs. Some states also offer incentives like sales tax rebates or other programs meant to lower the cost of going solar. Additionally, some utilities offer assistance in making solar more affordable for their customers.

What are the residential solar tax credit amounts?

Installing renewable energy equipment on your home can qualify you for Residential Clean Energy credit of up to 30% of your total qualifying cost, depending on the year the equipment is installed and placed in service.

• 30% for equipment placed in service in tax years 2017 through 2019

• 26% for equipment placed in service in tax years 2020 through 2021

• 30% for equipment placed in service in tax years 2022 through 2032

• 26% for equipment placed in service in 2033

• 22% for equipment placed in service in 2034

After 2034, the credit is scheduled to end.

As a credit, you take the amount directly off your total tax, rather than as a deduction from your taxable income.

Claiming the solar tax credit for rental property you own

You can't claim the Residential Clean Energy solar tax credit for installing solar power at rental properties you own unless you also live in the house for part of the year and use it as a rental when you're away.

• You'll have to reduce the credit for a vacation home or part-time rental property to reflect the time you're not there.

• If you live there for three months a year, for instance, you can only claim 25% of the credit. If the system cost $10,000, the 30% credit would be $3,000, and you could claim 25% of that, or $750.

  • $10,000 system cost x 0.30 (30% credit) = $3,000 full credit amount

  • $3,000 credit amount x 0.25 (25% of the year) = $750 partial credit amount

  Filing requirements for the solar tax credit

  To claim the credit, you’ll need to file IRS Form 5695 as part of your tax return. You'll calculate the credit on Part I of the form, and then enter the result on your 1040.

  • If in 2022 you end up with a bigger credit than you have income tax due — a $3,000 credit on a $2,500 tax bill, for instance—you can't use the credit to get money back from the IRS. Instead, you can carry the unused portion of the credit over to the following tax year. In this example, the $500 of credit that is greater than your tax bill ($3,000 – $2,500) can be carried over to the following year.

  • If you failed to claim the credit in a previous year, you can file an amended return to claim the credit.

  The residential solar tax credit has been extended through 2034 and expanded in value, so now might be a great time to add solar energy to your home. The tax credit can lower the effective cost of going solar while also lowering your overall carbon emissions produced compared to using conventional power sources. When combined with other energy efficiency home improvement credits made more accessible and worthwhile by the Inflation Reduction Act, investments in qualifying energy-related improvements have become more financially rewarding for homeowners to install.

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