As governments look for options to reduce dependence on oil and help reduce manmade climate change, the future of solar power looks bright. A study by the National Renewable Energy Lab suggests that solar energy could provide upwards of 45 percent of America’s electricity by 2050.
Of course, part of getting the country to that point involves the wide-scale adoption of solar technology. That’s where solar tax credits come into the picture. The Inflation Reduction Act of 2022 includes an extension of solar tax credits for residential and commercial property owners.
Not sure what the federal solar tax credit is or how it works? Keep reading for five things you should know.
1. What Are Tax Credits?
A tax credit essentially reduces the total income taxes you owe for any given year. So, let’s say that you owe $3000 in income tax. Let’s also say that you qualify for a $2500 tax credit.
Using that tax credit automatically reduces your total taxes down to $500. It’s important to differentiate between tax credits and tax deductions.
The tax credit applies to your overall taxes owed, regardless of your income. A tax deduction only reduces the total amount of your income that the government can tax.
So, let’s say that your taxable income for 2022 is $56,000. A $2500 tax deduction simply lowers that taxable amount to $53,500. While that will save you money, it won’t knock $2500 off the top of your owed income taxes.
2. How Solar Tax Credits Work
For federal tax purposes, the solar tax credit is known as the Investment Tax Credit. Its main goal is to encourage solar adoption among homeowners and businesses.
Under the federal tax credit for solar, homeowners can deduct 30 percent of the cost of a new solar panel system from their taxes. The recent extension of the ITC lasts through 2032, at which point it will step down the credit amount in 2033 to 26 percent and again in 2034 to 22 percent.
So, let’s say that you spend $17,000 on a new solar panel system. This credit lets you deduct $5,100 from your taxes.
Great, you say, but I won’t owe that much in taxes. What then?
Good news. The government will let you roll those credits over from one year to the next while the tax credit remains in effect.
So, let’s say that you owe $2350 in taxes. You can roll $2750 in tax credit over the following year’s taxes.
One thing to note is that the tax credit is not a cashback credit. If you owe $2350 in taxes, you can’t apply the whole $5100 credit in a single year to get the $2750 balance back in a refund.
3. It’s Not Just The Hardware
A lot of homeowners assume that the credit just applies to the actual hardware of the system. So, that would mean things like the actual solar panels, the inverter, wiring, and batteries for the system to store electricity. While all of those things apply under the credit, almost everything else involved with the installation also applies.
So, for example, a big chunk of the expense for the installation is the labor costs. After all, it’s usually a team of people who come out to do the installation and they all make an hourly wage. Those labor costs are eligible under the credit.
Most solar panel installations also require building permits. You pay fees to get those permits and you can include those as part of the credit. Even the sales tax you paid may apply.
The important thing is that you must hang on to all of your receipts for the project.
Granted, as long as your installation falls into the normal price range for a solar installation, you probably won’t get flagged for an audit. If you do get flagged, though, you want those receipts handy to prove that you paid what you said you did.
4. Qualifying
Considering how much you can potentially write off on your taxes, you might think that qualifying would prove a massive chore. As it turns out, there aren’t a lot of hoops to jump through when qualifying.
The first big qualifier is that you bought the system in the credit window, meaning between 2006 and 2032. Anyone looking at a new system now or in the near future will automatically meet this requirement.
You must actually buy or, as is more likely, get financing for a new system. You can’t lease a solar panel system and still claim the tax credit. You also can’t buy a home with solar panels and claim the credit, since the panels are likely used.
You must get the system installed at your primary home or a second home. The residence where you install the system must be in the United States. If you own a home in another country and install a system on that home, you can’t claim the tax credit.
5. It’s Not Just Federal
While most people focus on the federal tax credit because of its generous terms, it’s not the only credit or program available to homeowners. Many states offer their own tax incentives for residential or commercial solar panel systems.
You may also see cash rebate programs where states don’t offer tax incentives. In addition, local utility companies will often provide incentives for solar panel systems, such as discounts.
Something you should bear in mind before jumping on rebates or discounts is that those come off the top of your total system cost. That can lower your solar federal tax credit. You should do the math and see which program or combination of programs will save you the most.
Solar Tax Credits And You
Going solar is one way that you can help out with reducing dependence on fossil fuels. It’s also something the federal government and many state governments want to encourage. That’s why there are so many solar tax credits and other programs designed to reduce the cost.
While the ITC is the main tax credit that homeowners consider, make sure you investigate your local solar programs to see how else you can benefit.
Looking for more home improvement ideas? Check out the posts in our Lifestyle and Home Decor sections.
