The federal residential solar energy credit is a tax credit that you can use on federal income taxes for a specific percentage of the cost of a solar photovoltaic (PV) system.
You must set down in service within the tax year. Then it should produce electricity for a home located in the United States. There is no bright-line test from the Internal Revenue Service (IRS) on what accounts for “placed in service,”. Even so, the IRS has related it with completed installation.
In December 2020, Congress passed an appendix of the International Trade Commission (ITC). This provides a 26% tax credit for systems installed in 2020-2022. It also gave 22% for systems set-up in 2023. (Systems installed before December 31, 2019 were eligible for a 30% tax credit.) The tax credit be over commencing in 2024 if Congress didn’t renew it.
The amount that you can declare has no maximum value.
You are entitled for a solar tax credit if you meet the below mentioned criteria:
- Your solar PV system was installed between January 1, 2006, and December 31, 2023.
- The solar PV system is at your primary or secondary residence/home within the United States.
- For an off-site community solar project, if the electricity generated is credited against (and does not exceed) your home’s electricity consumption. The IRS has given permission for a taxpayer to claim a section 25D tax credit for buying a portion of a community solar project.
- You are the original owner of the solar PV system. (i.e., you purchased it with cash or through financing but you are neither leasing nor are in a position to purchase electricity generated by a system you do not own).
- Either the solar PV system is new or used for the first time. Only the “original installation” of the solar equipment will make you eligible to claim the credit.
Expenses that you can expect:
- you can only power an attic fan with the use of the solar PV panels or PV cells. (but not the fan itself).
- Contractor labor costs for onsite (accomplished or located at the site of the particular activity or happening) preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees.
- The balance-of-system equipment including wiring, inverters, and mounting equipment.
- Exclusively Charged energy storage devices by the associated solar PV panels, even if the storage is in service in a subsequent tax year to when you install the solar energy system.
- Sales taxes on acceptable and allowed expenses.
Solar tax that refund from the electric utility to install solar
Under most circumstances, grants supplied by your utility to you for the installation of a solar PV system are excluded from income taxes through an exemption in federal law. However. when this exclusion is provided, the utility rebate for installing solar is subtracted from your system costs before you calculate your tax credit.
For instance, if your solar PV system was installed before December 31, 2022, cost $18,000, and your utility gave you a one-time rebate of $1,000 for installing the system, your tax credit would be calculated as follows:
0.26 * ($18,000 – $1,000) = $4,420
Payment for renewable energy certificates
When your utility, or other buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental features of the electricity produced (either upfront or over time), the payment likely is contemplated or regarded as taxable income. In such instances, the payment will expand your gross income. But it will not reduce the federal solar tax credit.
Solar tax refund from my State Government
Unlike utility rebates, rebates from state governments normally do not lessen your federal tax credit.
As an illustration, if you can fix your solar PV system before December 31, 2022, installation costs totaled $18,000. Moreover, your state government gave you a one-time rebate of $1,000 for installing the system, your federal tax credit is calculated as follows:
0.26 * $18,000 = $4,680
State solar Tax Credit
State tax credits for installing solar PV mostly do not lower federal tax credits and vice versa. Nevertheless, when you receive a state tax credit, the taxable income you tell of on your federal taxes will be more than it otherwise would be; since you now have less state income tax to deduct. Moreover, the Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on state and local tax deduction. This in turn may impact whether a state tax credit influences federal taxable income. Declaring a state tax will ultimately make the tax credit to be productively taxed at the federal tax level
To give an example, the net percentage reduction for a homeowner in New York who claims both the 25% state tax credit and the 26% federal tax credit for an $18,000 system is calculated as follows, with an assumption of a federal income tax rate of 22%:
0.26 + (1 – 0.22) * (0.25) = 45.5%
(Note that because reducing state income taxes increases federal income taxes paid, the two tax credits are not additive (i.e., not 25% + 26% = 51%). For an $18,000 system, the total cost reduction in this example would be:
[$18,000 * 0.26] + [$18,000 * (1 – 0.22) * (0.25)] = $4,680 + $3,510 = $8,190)
How do other incentives or inducements I receive affect the federal tax credit?
For current information on incentives, including incentive-specific contact information, visit the Database of State Incentives for Renewables and Efficiency website.
Internal Revenue Service (IRS), 1111 Constitution Avenue, N.W., Washington, D.C. 20224, (800)829-1040.