According to figures published by the Solar Energy Industries Association, over 700,000 homeowners installed solar power in 2022.
This record-breaking number is largely due to growing awareness of the threat of global warming. Yet, there can be no doubt that the excellent savings offered by the new Residential Clean Energy Credit played a motivational role in this too.
Are you aware of how much you can save thanks to the solar panel tax credit? Keep reading to find out.
What Is the Solar Panel Tax Credit?
The residential solar energy credit is an amount you can claim on your federal income taxes after you install renewable energy in your home. It comprises a percentage of the total costs incurred to install solar panels and other energy-saving innovations.
To claim your incentive, you must complete your solar installation during the tax year. So, if you install solar in 2023, you must complete the installation between the April tax deadline dates if you want to claim for this year.
Installations completed during 2020 and 2021 fall under the old tax credit, which was 26%. Congress increased the tax incentive to 30% for homeowners who install solar between 2022 and 2032.
What Are the Criteria for Claiming the Tax Credit?
All types of solar panels and equipment qualify for the federal tax rebate, as long as they’re new and you own them outright. Used PV installations don’t qualify for the federal tax credit.
If you signed up for solar panel options like a solar lease or a PPA, you can’t claim the tax credit because you don’t own the equipment. You do qualify for the credit if you bought your system with a solar loan.
The tax credit only applies to your place of residence, you can’t claim this benefit for a commercial installation or a home you rent to other people. You can claim the tax credit if you install solar at your vacation home, as long as you don’t earn an income from this property.
You can claim a business solar tax incentive for income-generating properties, instead.
Which Expenses Qualify for the Tax Credit?
You can’t include the costs associated with financing your solar panels in your solar tax credit. These exclusions include interest and loan origination fees.
You can deduct 30% of expenses incurred for the following:
- Solar PV panels or PV cells
- Wiring, inverters, and mounting equipment used for the installation
- Energy storage devices with a capacity of over 3 kWh
- Sales tax on all eligible expenses
You can also deduct 30% of the costs for labor involving onsite preparation, assembly, and installation of your solar energy system. Permitting fees, developer fees, and inspection costs also qualify for the incentive.
Solar water heaters, geothermal heat pumps, fuel cells, and wind turbines are also eligible for the tax credit. You can’t claim anything if you install a previously owned solar system.
Structural elements required to support your solar panels, such as roof trusses and shingles, aren’t eligible for this incentive, but solar shingles and solar roof tiles are.
Do Other Incentives Affect Your Tax Credit?
Apart from the federal tax incentive, state governments, power companies, and suppliers also offer some attractive perks when you decide to install solar power.
So, during an online search for ”solar panels near me,” you’re bound to come across extra savings on things like down payments or discounts on solar equipment.
Although these might reduce the amount you can claim from your income tax, they can also help you get your solar system installed sooner, so you can start saving.
The following incentives may affect how much you can claim via the Residential Clean Energy Credit:
Utility Company Rebates
If you get a rebate from your utility company, you must deduct that amount from the initial cost of your solar installation before you claim your rebate.
For example, if your system cost $20,000 and you get a $500 rebate, you can only claim against the amount you paid, i.e., $19,500.
Net metering doesn’t impact your federal tax incentive as it’s not related to the cost of the equipment you install.
If you live in a state where you get a rebate for installing solar, these benefits don’t impact your federal tax credit. That means you don’t need to deduct these savings before you calculate your tax credit.
If you paid $20,000 for your solar system, and you get a state rebate of $1,000, you can still claim 30% of the original cost on your tax return.
State Tax Credits
State and federal tax credits have no impact on each other, except that your state solar incentive could affect your federal income tax return negatively. That’s because you’ll have less state tax to declare on your form.
The ability to cash in on both state and federal credits helps even things out and ensures Americans truly benefit from solar panel incentives.
Renewable Energy Certificate Payments
When you generate solar power, you receive renewable energy certificates per MWh, valued according to local market prices. Utility companies often buy these RECs from their customers to make up for any shortfall in their green energy production.
These payments are taxable income, so they’ll increase the amount of tax you owe but don’t reduce the federal tax credit.
Wrapping Up the Solar Tax Credit
Homeowners who install a residential solar system before 2032 can deduct 30% of the costs incurred from their annual taxes in the year of installation.
The incentive is only applicable to items directly related to installing solar panels, and you must own the equipment to qualify for the tax credit. Other criteria include having a taxable income and installing the panels on your primary or secondary residence.
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