Clients often come to Cody Ravalli, CPA with questions about tax credits for homeowners who install solar panels. This guide will answer many of those questions. Taking advantage of the residential solar panel tax credit requires the tax advice and guidance Cody can provide.
What is a tax credit?
A tax credit is a direct deduction from your income tax liability, equivalent to the amount claimed. For instance, if you qualify for a $1,000 federal tax credit, your federal income tax obligation will be reduced by $1,000. The federal tax credit is occasionally known as an Investment Tax Credit (ITC) but shouldn’t be confused with the ITC provided to businesses owning solar systems.
What is the residential solar tax credit?
The residential solar energy credit is available for individuals to claim on their federal income taxes. Taxpayers can receive a credit for part of the expenses incurred in purchasing and installing a solar photovoltaic (PV) system. This credit is specifically applicable to solar energy, although similar credits may be available for other types of renewable energy sources.
To qualify for the credit, the installation of the solar system must be completed within the same tax year. Solar PV systems installed in 2020 and 2021 qualify for a tax credit of 26 percent. Congress approved an extension of the Investment Tax Credit in August 2022, increasing the credit to 30 percent for installations between 2022 and 2032.
Additionally, systems installed on or before December 31, 2019, were also eligible for a 30 percent tax credit. From 2033 onwards, the credit will gradually decrease to 26 percent for systems installed in 2033 and 22 percent for systems installed in 2034. Unless renewed by Congress, the tax credit will expire starting in 2035. There is no maximum limit on the amount that can be claimed under this tax credit.
Am I eligible to claim the federal solar tax credit?
You might be eligible for this tax credit if you meet the following criteria:
- Installation. You installed solar panels between January 1, 2017, and December 31, 2034.
- Location. The solar PV system is located at your residence.
- Ownership. You either own the solar PV system outright (purchased, not leased) or have purchased an interest in an off-site community solar project. In the case of a community solar project, the electricity generated should be credited against your consumption and not exceed the electricity needs of your home.
- New System. The solar PV system must be new or utilized for the first time. The tax credit can only be claimed for the “original installation” of the solar equipment.
Notably, because this is a tax credit, you must have taxable income to qualify.
What expenses are included in the solar panel tax credit?
The following expenses are included in the federal solar panel tax credit:
- Solar photovoltaic (PV) panels or PV cells (including those utilized for powering an attic fan but not the fan itself)
- Contractor labor expenses for original installation including fees for permits, inspections, and development
- Balance-of-system equipment (e.g. wiring, inverters, and mounting equipment)
- Energy storage devices
- Sales taxes incurred on eligible expenses
How do other incentives I receive affect the federal tax credit?
Other incentives you receive for installing solar panels may affect your tax credit:
Rebates From Utility Companies
Generally, subsidies provided by your utility to install a solar PV system are excluded from the tax credit. The utility rebate for installing solar panels is subtracted from your costs before you calculate your credit. For example, if the cost of your solar PV system installed in 2022 was $20, 000, and your utility gave you a $1,000 rebate, your tax credit would be calculated as follows: ($20,000 – $1,000) x 0.30 = $5,700.
However, compensation from a public utility for excess generated electricity not consumed by the taxpayer but delivered to the utility’s electrical grid (for example, net metering credits) is not considered a subsidy and does not affect the taxpayer’s credit qualification or amounts.
Payments for Renewable Energy Certificates
If you receive cash or incentives from your utility or another buyer in exchange for renewable energy certificates or other environmental benefits of the electricity generated, such payments are generally considered taxable income. While the payment will increase your gross income, it will not reduce the federal solar tax credit.
Rebates From State Governments
State government rebates generally do not reduce your federal tax credit, unlike utility rebates.
State Tax Credits
State tax credits for installing solar PV systems typically do not directly impact federal tax credits, and vice versa. However, it’s important to note that if you receive a state tax credit, it may affect the taxable income reported on your federal tax return. This is because the state tax credit reduces your state income tax, which in turn may result in a higher taxable income for federal tax purposes, as you now have fewer state income tax deductions available.
Talk To A Residential Solar Panel Tax Credit Expert Today
If you are considering installing a Solar PV system at your home or have already done so, contact Cody Ravalli CPA to get started on filing your residential solar panel tax credit. Located in Brooklyn, Cody serves clients throughout New York and around the country. Call for a 10-15 minute free consultation.