Guide to the 2024 Federal Solar Tax Credit
America is racing against global warming to reach its solar goals. The Biden administration is hoping to attain 80% renewable energy throughout the country by 2030 and achieve 100% carbon electricity by 2035. But with about 68% of energy consumption still derived from petroleum or natural gas in 2023, we may be falling behind. The United States is doing everything it can to get businesses and individuals on board with solar. One key incentive is the 2024 federal solar credit. The credit offers tax payment reductions for a percentage of solar installation and materials. Find out more about the ITC and how you can qualify.
What is the Federal Solar Tax Credit?
The solar tax credit is not a deduction or a refund. It lowers the amount you owe in taxes by a percentage of what you spend on your solar system.
The percentage amount fluctuates. In 2024, the government will be offering a tax reduction that equals 30% of your total solar system cost.
You can claim the credit the same year you install your system. You cannot claim the credit more than once. However, the credit may be spread out over several years.
For example, if you install a $15,000 solar system, you will be eligible for a $4500 payment reduction. If you owe $10,000 in taxes, the amount will be reduced to $5500.
If you owe $2000 in taxes, the credit will eliminate your payment. The additional $2500 will be carried over to the following year. You will continue getting reductions until you receive your full credit.
The IRS does not provide cash payments for solar system installation. Individuals cannot claim a credit if they do not owe any taxes.
What is the History of the Solar Tax Credit?
The Solar Tax Credit was established in 2005 as part of the Energy Policy Act. It offered an investment tax credit of 30% of solar expenditures. It was initially set to run from Jan 1, 2006, to Dec. 31, 2007, and expire at the end of the year, but legislation extended it by an additional year.
Then, the 2008 Economic Stabilization Act (aka that bank bailout) of 2008 extended the ITC an additional 8 years through 2016.
In 2009, the American Recovery and Reinvestment Act broadened the ITC to include additional technologies and expenditures. The Solar Grant Program was added. It provided payments instead of tax credits.
The program has since been depleted, but it is credited for jumpstarting growth in the solar industry sector.
The ITC remained at 30% for over a decade. But in 2019, the government decided to reduce It. They originally set a decline trajectory from 30% to 10%. But, after some consideration, they opted for a softer reduction. It fell to 26% in 2020 and 22% in 2021.
In 2020, the government suggested another step-down, which would reduce the percentage of credits to 26% in 2022 and 22% in 2023. But it was once again overridden, and the percentage remains at 30%.
However, the credit is set to fall to 26% in 2033 and 22% in 2034 as part of the phase-out plan.
Who is Eligible for the Solar Tax Credit?
To be eligible for the solar tax credit, you must be:
A U.S. homeowner, mobile homeowner, houseboat owner, condo owner or corporation member.
You must own your system; the credit is not available to those who rent or rent to own
The system must be new, it cannot be reused or repurposed.
The system must be installed when the credit is available, i.e., between Jan. 1, 2006, when the credit first became available, and Dec. 31, 2034, when the credit is expected to end.
The system must be located in your primary or secondary residence. It can also be used for an off-site community project, but you cannot exceed your home’s electricity consumption and you must be responsible for the project’s expenses.
There are no income requirements for the solar tax credit.
How Do I Claim My Federal Solar Tax Credit?
You can claim your federal solar tax credit when you file your tax refund. You will need documentation that shows the cost of the system. Your installer should give you this documentation when the system is installed.
Here is the process you must follow to claim your credit:
1. Download IRS Form 5695
2. Fill out part 1 to calculate the credit. You must enter your system and installation costs on line 1 and complete the calculations on lines 6a and 6b.
3. Use line 14 to calculate tax liability limitations. Refer to the IRS Residential Energy Efficient Property Credit Limit Worksheet if necessary.
4. Complete the calculations on lines 15 and 16. Enter the figure from line 15 on line 5 of your Schedule 3 Form 1040.
Consult a tax professional to ensure your form is filled out correctly.
Can I Claim the Federal Solar Tax Credit on My Rental Property?
You can claim a federal solar tax credit on a vacation or rental property that you own. However, the credit you claim will only reflect the amount of time you inhabit the property.
So, a $15,000 system would normally yield a $4500 tax credit. But if you live in your rental property for 6 months of the year, you would only be eligible for a $2250 tax credit.
Can I Claim the Tax Credit on a New Home Purchase?
Yes, if you move into a new home with solar already installed, you can claim the Residential Clean Energy Credit for the year you move in regardless of when the home was built or sold. So if the home was built or sold to you in 2020, but you did not move in until 2023, you can claim the credit on your 2023 taxes.
Will the Credit Percentage Change?
The Inflation Reduction Act of 2022 outlines fluctuations in the ITC percentage change as follows:
Consumers with solar equipment installed between 2022 and 2032 are eligible for a 30% credit.
Consumers with solar equipment installed in 2033 are eligible for a 26% credit.
Consumers with solar equipment installed in 2034 are eligible for a 22% credit.
The tax credit is set to expire in 2035, although it may be renewed by the government.
What is Covered Under the Federal Solar Tax Credit?
According to the EERE, consumers are eligible to receive a credit for the following expenses.
Solar panels including PV solar panels and PV solar cells
Additional equipment such as inverters and mounting equipment
Batteries- The credit will cover batteries charged by your solar panels. It does not cover batteries installed with your solar system, batteries added to an existing system, or stand-alone energy storage.
Labor including on-site preparation, assembly, permitting fees, developer fees, inspection costs, and installation
Sales tax on your solar system equipment and labor
How Much Will a Solar System Cost with the Solar Tax Credit?
The solar tax credit makes solar systems more affordable. The average homeowner says they spent $15,000 to $20,000 on their systems. The tax credit brings that average down to $10,500 and $14,000.
However, the money you spend and the amount you save will vary depending on the size of the system, the roof type, the equipment needed, possible installation issues, permit and licensing costs, and other factors.
Other Incentives
Consumers who choose to go solar can save even more money by combining their federal local tax credits with state and local incentives. Available incentives vary depending on location, but some of the more common ones include:
Tax Credits
Some consumers may be eligible for both state and federal tax credits. States currently offering tax credits include Arizona, Colorado, Hawaii, Massachusetts, Maryland, and New Mexico. Check with your local tax associations to determine your eligibility.
State credits and federal tax credits can be combined, but you must pay federal taxes on the value of your state tax credit.
Net Metering
Most states require net metering. It is a process in which solar panels are connected to the public utility power grid so surplus power can be transferred to the grid. Consumers are not billed for the energy that’s transferred, so they save money on their utility bills.
Idaho and Texas are among the few states that do not mandate state metering, but most utility companies offer the program.
Tax Exemptions
Most states offer tax exemptions for solar equipment. These exemptions mean homeowners do not pay taxes on the value solar panels add to their properties.
Some consumers will also be eligible for exemptions for solar equipment. Your solar installer will provide you with the paperwork you need to qualify for exemptions.
Are Businesses Eligible for the ITC?
Yes, businesses are eligible for the ITC. However, they can also qualify for a production tax credit (PTC) for the first 10 years of a system’s operation. The credit reduces federal income tax liability and is adjusted annually for inflation.
Businesses cannot qualify for the ITC and the PTC. They must choose one or the other.
Businesses must meet the following eligibility requirements to receive the ITC or PTC:
Must be located in the United States or U.S. territories
Must use equipment that’s new or has limited previous use
The solar system must not be leased to a tax-exempt entity.
Businesses are better off using the PTC for large-scale projects in sunny places because they will yield credit over time with peak performance.
Projects that may not perform as well due to high installation costs, a lack of sunshine, and other factors will benefit from the one-time payment of an ITC.
Can Non-Profits Benefit from the ITC?
Organizations with a 501c designation cannot benefit from the Solar Investment Tax Credit. However, the Inflation Reduction Act has created a direct pay option that offers tax incentives to tax-exempt entities, Native American tribal governments, state governments, political subdivisions, rural electricity co-ops, the Alaska Native Corporation, and the TVA for tax years beginning Jan. 1, 2023, and ending Dec. 31, 2032.
The entities may qualify for a direct payment instead of tax credits. However, if the solar system is financed with 100% tax-exempt debt, the direct pay amount will be reduced by 15% or the portion of the system financed with the debt will not be accounted for in the direct pay amount.
What are ITC Adders?
Certain projects may be eligible for 10% adder credits. They include:
Section 48 (low energy output) projects that adhere to apprenticeship and wage requirements
Projects that utilize supplies manufactured in the United States
Project sited in energy areas
Adders of 10% to 20% may be awarded to applicants that build in low-income areas
Check the SEIA website for more details on adder credits.
Are Solar Panels Worth It?
Solar panels are an expensive investment, but they pay off in long-term energy savings. Market Watch Guides show households will save around $1346 a year on energy bills. If you combine that with incentives and the decreasing cost of solar panels, a solar system will save you money in the long run.
However, some consumers will have a difficult time making their money back off solar. This could be the case if you live in a state that does not offer many incentives, or if you have installation issues due to your roof type or position.
Will the ITC Extend Beyond 2034?
The ITC has been extended through 2034. The credit percentage is set to reduce in 2033 and again in 2034 as part of the bill’s phase-out. It is assumed that America will reach its solar goals in 2035 and the incentive will no longer be necessary.
However, the bill has been extended after predicted phase-outs before. Will it happen again? Only time will tell. The decision depends on industry demands and where America is at in reaching its net zero emission destination.
The ITC incentivizes people and businesses to go solar via a tax credit. Credits can be claimed on yearly income taxes for the same year the system was installed. They were created to reduce the impact of inflation and help America reach its green goals.
Now that you know more about the ITC, you can determine if solar is the best choice for your home or company.
