How to Get the Best Return on a Solar Panel Investment with Tax Credits
The federal solar tax credit is a tremendous economic incentive for homeowners to invest in a solar system or battery storage since it offers the greatest return on investment of any option available.
If you upgrade your residence with solar energy equipment any time between now and the end of 2032, then you are eligible to receive a nonrefundable solar tax credit on your federal income taxes that is equal to 30% off all qualifying expenses!
There are no maximum limits on the amount of your residential solar system-related expenses that you can use to qualify for a 30 percent tax break. Solar panels, mounting equipment, and even contractor labor for installation are covered.
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How does the solar tax credit work?
The average cost to install solar panels is $16,000, depending on the state and type of panels. Since the solar tax credit is a non-refundable credit worth 30% of the gross system cost of your solar project, that means that for a gross system cost of $16,000, your tax credit would be $4,800 ($16,000 x 30% = $4,800).
It is essential to recognize that the solar tax credit does not automatically come in the mail when you set up a solar panel system. In reality, it’s an income tax credit that can ultimately maximize your refund or minimize how much money you owe at the end of the year.
If you installed a solar system and the city inspector approved it in 2023, then you can receive a tax credit when filing your federal income taxes for 2024! If the amount of tax owed exceeds this sum, you can take full credit. On the other hand, if it’s lower than your tax credit, you can carry over any uncollected credits into future years.
How does the solar tax credit work with state, local, and utility incentives?
Solar customers can receive many cost-lowering incentives, such as electric utility rebates and renewable energy certificates, state government rebates, and tax credits. These reductions will not only lessen the amount you spend immediately but also reduce what you report for taxes on your IRS filing.
State solar tax credits and incentives
Unlike utility incentives, state government incentives usually do not need to be deducted before the federal tax credit is calculated.
So, if you installed a $16,000 system and got a $1,000 state government rebate, the solar tax credit would be based on 30% of the initial price of $16,000. In this example, a federal tax credit would be worth $4,800. That would mean you would get a total of $4,800 in incentives.
While state and federal tax credits for installing solar panels are independent, claiming a state credit will raise the taxable income you report on your federal taxes since there is less state income tax to deduct. The end result of claiming a state tax credit is that the amount of the state tax credit is effectively taxed at the federal tax level.
Solar incentives vary widely from state to state, but California, Hawaii, Texas, Minnesota, and New York offer some of the most generous packages. Hawaii is particularly outstanding for its solar tax credit – a whopping 35% with an absolute maximum reduction of $5,000!
For the most comprehensive and up-to-date information about current state incentive levels, see the Database of State Incentives for Renewable Energy (DSIRE).
Utility Incentives
Before determining the federal tax credit, many utility companies will subtract your rebate from the total cost. Therefore, your tax credit will have a decreased value.
For instance, assume you pay $20,000 for a solar system and receive a rebate of $1,000 from your electrical company. Rather than the tax credit being computed on the original cost of $20K, it would be based on the net amount once subtracting out that utility rebate, thus equaling just $19K in this particular situation.
State Government Rebates
Some states offer upfront rebates for installing a solar power system. They are typically only available for a limited time while funds are available, so research rebates in your state to get in on the incentive before it runs out. A state government rebate can reduce your solar costs by 10% to 20%.
Solar Renewable Energy Certificate
Solar Renewable Energy Credits (SRECs), also known as Solar Renewable Energy Certificates, are state-level incentives that reward solar panel owners. After registering your system with the relevant authorities, they will check your energy production and provide SRECs according to their regulations.
You can sell these credits to a local utility company or another buyer for cash, which is considered income and subject to taxation.
Local Utility Rebates
Many local utility companies offer financial incentives to encourage homeowners to adopt solar power systems. These can include rebates based on the energy generated by your system and one-time subsidies for installation costs.
Performance-based incentives (PBIs) reward you with a credit per kilowatt-hour of renewable energy produced by your system.
Subsidized Loans
Your state, your local utility, or an organization that is not part of the government may be able to help you get a loan to buy your solar panel system.
Before you purchase your system, discuss options for subsidized loans with an installer in your area; they’re likely to know about every solar program available locally.
Tax Exemptions
In addition to tax credits, you may be eligible for certain tax exemptions after you install a solar system. Even though these systems will increase your property value, some states and municipalities will not include them when assessing property taxes, so your property tax bill will not go up with a solar installation.
Some states also have programs to ensure all purchases of solar power system components are exempt from state sales taxes, which could save you hundreds of dollars when you go to install your system.
What Is Covered Under the Solar Tax Credit?
Most, if not all, of the costs associated with installing solar panels are eligible to be covered by the federal solar tax credit.
The following items are some of the expenses covered under the solar tax credit:
SOLAR PV (PHOTOVOLTAIC) PANELS
Capturing the sun’s rays, PV panels, otherwise known as solar panels, transform their energy into electricity. This generated power is generally used to operate appliances and devices within one’s home.
PV CELLS
PV cells harvest the sun’s energy, converting it into electrical power to run solar or PV fans. The government currently provides a tax credit for these solar-powered cell components; however, this incentive program does not cover the actual fan devices.
CONTRACTOR LABOR
The solar tax credit was designed to cover the costs of any professional contractor labor you may incur while assembling, installing, or preparing your residential solar equipment.
MISCELLANEOUS EQUIPMENT
Additionally, you’ll need to acquire necessary tools such as inverters, mounting systems, wiring supplies, and supplementary equipment to power your solar energy system.
STORAGE BATTERIES
Homeowners can store the extra energy their solar system produces on high-sun days by utilizing storage batteries. When needed, this stored energy provides a backup plan for those times when solar power is unavailable or limited due to clouds and nightfall.
With the Solar Tax Credit, you can buy and install storage batteries even after your initial solar system installation—even years later—and still be eligible for the tax credit benefits.
SALES TAX
In addition to the products, components, and services you procured, eligible costs may also be claimed for sales tax.
Technically, the tax credit isn’t just for solar installations. Other clean energy systems can also get tax credits, including solar water heaters, fuel cell systems, geothermal heat pumps, and even small wind energy systems!
Find the top solar companies near you if you’re thinking about making the switch to solar energy.
How Do I Claim the Federal Solar Tax Credit?
To claim the federal solar tax credit, solar system owners should fill out IRS Form 5695 when filing their federal tax returns.
If the solar panels were installed in 2022, the homeowner could apply for the solar credit with their 2022 federal taxes.
You can save significantly on your solar power system installation by taking advantage of the various solar tax credits and financial incentives available. While there is an initial cost associated with installing this technology, utilizing these programs will help reduce the overall expense dramatically.
Now is the ideal time to invest in solar energy. Various other national incentives may expire sooner than expected, such as net metering, which pays you for every unit of electricity generated from your solar panels that gets sent back into the grid. Utilities across the country are moving away from net metering and paying solar customers less money for solar electricity.Take the SmartSolar Homeowner Quiz for a quote on solar panel installation.