For many people, home solar offers the ability to save money on electricity costs each month. While the costs to go solar have dropped over the years, not everyone can afford to go solar. The solar tax credit was created for this very reason.
But what exactly is the solar tax credit and how do you know if you qualify?
- The solar tax credit is a reduction you can earn on your federal income tax by installing solar.
- In order to get the credit, you must meet the tax credit requirements.
- The tax credit currently covers 30% of the costs to go solar, which include hardware, labor, and other fees such as taxes and permits.
- To claim the credit, you must file IRS Form 5695 as part of your tax return.
- You may still be able to get the credit if you don’t owe federal income tax after submitting your tax return.
In This Article:
- What Is The Solar Tax Credit?
- How Does The Solar Tax Credit Work?
- What Does The Solar Tax Credit Cover?
- Do I Qualify For The Solar Tax Credit?
- How Do I Claim The Solar Tax Credit?
- How Much Can I Save?
What Is The Solar Tax Credit?
The solar federal tax credit is a dollar for dollar reduction in the amount of income tax you owe that you can earn by installing a qualified solar system. As of 2023, the tax credit will cover 30% of the costs to go solar.
While the cost to switch to home solar has dropped significantly in recent years, it’s still unaffordable to many people. With this in mind the U.S federal government created the solar tax credit as a way to help bring down the costs to switch to solar power.
How Does The Solar Tax Credit Work?
By installing solar power at your residence, you may be able to earn the solar tax credit. If you qualify, you can use to solar tax credit dollars towards your federal income tax.
Depending on how much you qualify for, you can pay some of, or all of what you owe in taxes using your solar tax credit dollars.
As an example, if you owe $5,000 in federal income tax and you qualify for $3,000 through the solar tax credit, your tax liability can be lowered to $2,000. In this example you qualified for less than what you owe in federal income tax.
If you qualify for more than you owe, you can roll the solar tax credit dollars over to the following years.
Two Important Notes:
- The solar tax credit is not a tax rebate.
- You don’t have to “owe” federal income taxes you only need to pay federal income tax.
The solar tax credit is not a rebate. This means you will not get any unused amount of the tax credit back. To use any amount of the solar tax credit, you must apply it towards federal income tax.
With that said, many people believe they won’t qualify because they expect to get a return on their federal income tax. However, this does not automatically mean you cannot get the tax credit. This is because you may already have federal income tax being taken out of your paycheck automatically each year.
For example, if you are owed $500 after filling your taxes, but had $5,000 in federal income tax taken from your paycheck, you can still qualify for the solar tax credit
You can end up getting a tax refund because of the credit, but this is only if you overpaid taxes during the year and the solar tax credit reduced your tax liability such that you are owed money.
What Does The Solar Tax Credit Cover?
The solar tax credit helps cover the cost of all hardware and labor involved in your installation. This includes:
- Solar panels (Solar electric or solar hot water)
- Mounting equipment
- Battery Storage (over 3 kWh)
- Related taxes, inspections, and permits
The exact total cost of these things depends on the amount of solar power you’re able to collect and the amount of electricity you use, so the cost will change from home to home.
What The Tax Credit Does Not Cover
- The solar tax credit cannot be earned in the following situations:
- An attic fan (panels to power the fan are acceptable)
- Heating a pool
- Energy storage under 3 kWh (greater than 3 kWh is acceptable)
- Leased solar systems
Do I Qualify for the Solar Tax Credit?
In order to qualify for the credit, you must meet the following requirements:
- You must be installing a solar system in either your primary or secondary residence in the US.
- The system must also either be purchased outright or through financing options.
- You must also be installing a new solar system meaning the tax credit cannot be used on an existing solar system.
- You will not qualify for the tax credit if you lease your solar system.
- You may be able to qualify under community solar however.
- You may also be able to get the tax credit if your home is not connected to the electric grid.
- You can only qualify for the tax credit once, unless you are applying for a different home and have enough tax liability to reduce.
- There is no limit to how much you can qualify for, as long as you have enough tax liability.
Installing Solar At Your Primary or Secondary Residence
You must be installing a solar system in either your primary or secondary residence in the US. This means you cannot get the solar tax credit on rental properties you own, unless you live there for a part of the year. In that case, you’ll get a certain percent of the credit based on the percent of the year you live in the rental property.
Here are some qualifying housing types:
- Mobile home
- Cooperative apartment
- Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards
Purchasing or Financing a System
The system must either be purchased outright or through financing options, but you won’t qualify for the tax credit if you rent or lease your solar system, even if you own your home.
Installing a New System
You must also be installing a new solar system meaning the tax credit cannot be used on an existing solar system.
How Do I Claim the Solar Tax Credit?
How Much Can I Save With The Solar Tax Credit?
The tax credit is currently set at 30% and will remain there until 2032. The average cost to go solar is about $30,000. In that case, you’ll have $9,000 dollars that you’ll be able to deduct from your federal income tax.
The tax credit was supposed to be 26% in 2022 and drop to 22% in 2023. However, under the Inflation Reduction Act passed in 2022, the tax credit was set to 30% and will remain there until 2032.
In 2033, the tax credit will drop to 26%, in 2034 it will be 22%, and in 2035 the tax credit is set to expire. This gives people 10 years to take advantage of the full 30% tax credit.
- Is The Tax Credit Refundable?
- What If I Don’t Owe Federal Income Tax?
- Does Solar Hot Water Or Solar Roof Tiles Qualify For The Credit?
- Will I Still Qualify For Other Incentives?
Is The Tax Credit Refundable?
The tax credit is not refundable. You won’t get any unused balance back as a check. In order to use any amount of the credit, it must be applied to your federal income tax.
What If I Don't Owe Federal Income Tax?
You must have federal income tax to use the solar tax dollars. Keep in mind that even if you owe money on your taxes, you may have already paid federal income tax. In that case, you would be able to use the tax credit. If you don’t owe or pay federal income tax, you won’t be able to use the credit.
Do Solar Hot Water or Solar Roof Tiles Qualify For The Credit?
You can get the solar tax credit for both solar hot water and solar electric. Since solar roof tiles are a solar electric technology, they do qualify for the credit.
If you need a new roof however underneath the tiles, this is not covered under the federal tax credit, but some states may have incentives to help save money, including to help get a new roof.
Will I Still Qualify For Other Incentives?
The solar tax credit does not exclude you from receiving other incentives. However, it may make it more difficult to use all of the money from other federal tax credits such as the electric vehicle tax credit. This is because you would need to pay enough in federal income tax in a single year to deduct both tax credits.
Recommended Solar Providers
One last bit of advice, not all solar providers are honest about the solar tax credit. There are countless stories of solar providers who will mislead you about the solar tax credit and even try to take it from you.
We recommend getting multiple quotes through Energy Sage for the following reasons:
- Getting multiple quotes ensures you’ll get the best pricing for your solar installation
- Allows you to select a provider with a good work history and reviews
- Allows you to compare pricing on different solar equipment
- You’ll also get connected to an Energy Advisor if you’re interested
- EnergySage solar providers won’t call or stop by your house with unwanted visits