Federal Solar Tax Credit
The federal solar tax credit is back to 30%, and there’s never been a better time to install solar and start saving on energy costs.
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law, immediately activating the Residential Clean Energy Credit for solar, battery storage, and more.
Also known as the Investment Tax Credit (ITC), this solar incentive was at 26% in 2022 and scheduled to step down to 22% in 2023 before going away entirely for residential solar in 2024. However, with the IRA in effect, the tax credit is back to 30% until 2032… or until a future administration repeals it.
In this article, we’ll explore the new and improved federal solar tax credit and show you how step-by-step to claim it.
What is the Federal Solar Tax Credit?
The Residential Clean Energy Credit (formerly known as the ITC) is a tax credit worth 30% of the gross cost of your solar project (parts, labor — the whole chalupa) with no maximum incentive amount.
So if your all-in solar cost is $25,000, your federal solar tax credit would be worth $7,500. If you spend $75,000 on solar and battery, your tax credit would be worth $22,500.
The only requirements to use this incentive are:
- You own the system by going solar via cash or a solar loan (lease or PPA financing cannot claim the tax credit)
- You have income tax liability, which is what this incentive reduces
We’ll cover how to claim your federal solar tax credit later on. First, let’s see how the federal solar tax credit got to 30% in 2022.
Federal Solar Tax Credit Step Down Schedule
Since its creation in 2005, the solar tax credit has gone through several updates and wore several nametags. So, for the sake of simplicity, we’ll just refer to it as the “federal solar tax credit.”
The last time it was at 30% was 2019. Then it stepped down to 26% for 2020-2022. It was scheduled to step down to 22% in 2023 before expiring for residential solar customers in 2024.
But in swooped the Inflation Reduction Act to bring the incentive back to 30% for another ten years.
Here’s the new and improved federal solar tax credit step-down schedule:
As you can see, the new schedule has the credit at 30% until it steps down to 26% in 2033 and 22% in 2034. And the 30% credit applies retroactively to solar and battery projects installed in 2022.
So if you installed solar in 2022 while the tax credit was at 26%, you will be able to claim an additional 4% of the project costs on your taxes.
This article is for informational purposes only and does not constitute tax advice. Please consult a licensed tax professional with questions about claiming the Residential Clean Energy Credit.
How big of a difference is a 26% tax credit versus a 30% tax credit?
Since the federal solar tax credit is applied to your solar array’s gross system cost, the amount you receive is dependent on the amount of solar you’re purchasing: bigger system, bigger credit.
Here’s a quick example of the difference in credits in 2021 and 2022 for a 9 kW solar array at an average cost of $27,000.
- Installed and claimed in 2021 taxes at the 26% level, your credit would be $7,020.
- Installed and claimed in 2022 taxes at the full 30% level, your credit would be $8,100.
That’s a savings difference of $1,080, equal to a year’s worth of $90 utility bills.
How is the Federal Solar Tax Credit Calculated?
The equation for figuring out how much your solar tax credit is worth is simple.
Gross cost of project x 0.30 = tax credit value
So if your project costs $30,000, your tax credit will be worth $9,000 ($30,000 x 0.30 = $9.000).
The gross system cost may include improvements needed to facilitate the solar installation, such as electrical box upgrades. However, it’s best to speak to your tax advisor about your unique circumstances.
The credit is a dollar-for-dollar income tax reduction. This means that the credit reduces the amount of tax that you owe. It also means that you have to pay and file taxes in the same tax year in order to receive the credit.
Now that we know how to calculate your solar tax credit, let’s go over how to claim it.
How To Claim Your Solar Tax Credit
To claim the federal solar tax credit you will need to file an IRS Form 5695 for the tax year that your project was deemed operational, usually by a city inspector.
So, if your solar panels passed a city inspection on August 14, 2023, then you would claim your Residential Clean Energy Credit when you file your 2023 taxes (probably in early 2024).
We’ll walk you through the basic process of filing for the federal solar tax credit, but we recommend talking to a tax professional to make sure you’re not missing anything.
What Do I Need to File?
You will need four IRS tax forms (plus their instructions) to file for your solar panel tax credit.
- Form 1040 (standard federal income tax form)
- Schedule 3 (Form 1040)
- Form 5695 (Residential Energy Credit form)
- Form 5695 Instructions (Residential Energy Efficient Property Credit Limit Worksheet)
Federal Solar Tax Credit Filing Step-by-Step
The following is a fictional scenario to be used for example purposes only. Consult a licensed tax professional with questions.
Let’s go through the basics of claiming a federal solar tax credit using a fictional $30,000 expenditure on a solar system.
Step 1: File your taxes as normal
Begin by filing your taxes as you normally would. Tally your income, claim dependents, deduct your charitable donations — all that fun stuff.
Your solar tax credit comes into play on Line 5 of Schedule 3 (Form 1040). This form is for claiming additional credits and payments, including residential energy credits.
When you hit this point, it’s time to switch to Form 5695 to calculate your residential energy credit amount.
Step 2: Fill out Form 5695
We’ve modified Form 5695 below to show an example scenario for a $30,000 solar purchase and the 30% tax credit available from 2022-2032.
We’ll assume you only installed solar equipment, so we can skip lines 2-5 and keep it simple.
Input the gross cost of your solar installation in Line 1, then multiply it by 0.30 in Line 6b to find your credit amount. In this scenario, it’s $9,000.
Carry this figure down to Line 13. Then use the Residential Energy Efficient Property Credit Limit Worksheet (Page 4 of the form 5695 Instructions) to calculate your tax liability for Line 14.
If Line 14 is greater than Line 13, you can use your entire tax credit in one year. Hooray!
If Line 14 is less than Line 13, you won’t be able to use your entire tax credit in one year. Don’t worry, it can be carried over to next year (as you can see in Line 16).
Fill in Line 15 with the smaller of Line 13 or Line 14.
Here’s how that looks on the 2022 form:
In this scenario, we’ll assume the tax credit in Line 13 is smaller than the liability in Line 14, and the full credit can be claimed in one year. So $9,000 is the federal solar tax credit amount that will be entered into Schedule 3 (Form 1040), Line 5.
Step 3: Complete Schedule 3 and Form 1040
Using Form 5695, we calculated a $9,000 federal solar tax credit for purchasing a $30,000 solar system.
Now, we’ll enter that amount into Line 5 of the Schedule 3 (Form 1040) pictured below, which is where nonrefundable credits are claimed.
Complete the entire Schedule 3 form to get a final total in Line 8, and then enter that amount into Line 20 on page 2 of Form 1040.
Quick Tip: The Schedule 3 (Form 1040) and Form 1040 are separate forms.
Here’s what the 2022 Form 1040 looks like with the Residential Energy Credit entered from Schedule 3 (Form 1040):
Once your federal solar tax credit is on your Form 1040, the rest is business as usual!
The federal solar tax credit reduces the total tax Uncle Sam wants to collect for the year, shown in Line 24, and can increase your refund or decrease the total amount you owe after payments and refundable credits.
What If My Tax Liability Is Lower Than My Solar Tax Credit?
As a nonrefundable credit, the solar tax credit can only be used to reduce tax liability. It is not a check with the subject line “Thanks for Going Solar” that automatically comes in the mail after you install solar.
So what if your tax credit is greater than your tax liability?
Let’s go back to our scenario above and pretend you have a $9,000 solar tax credit and only $5,000 in tax liability. You would be able to claim $5,000 of the tax credit the first year, and then the remaining $4,000 can be carried over to the next year.
The IRS hasn’t announced new rules on this yet, but in the past, the federal solar tax credit could be carried over for as many years as the incentive was active. The Residential Clean Energy Credit is active until 2034, so if you install it in 2023, you’ll likely have plenty of time to use it over several tax years.
However, there are scenarios, particularly for retired people with very low tax liability, in which solar customers won’t be able to use the full credit. Obviously, that’s not ideal, but it’s important to remember that even without the tax credit, there are numerous other benefits of going solar.
How Do Solar Loans Affect the Solar Tax Credit?
There are two types of solar loans in relation to the tax credit.
Type 1 has one monthly payment amount. These loans assume that you will submit your tax credit to the lender to buy down your principal and secure that monthly payment.
If you do not put your tax credit back into your loan, this will initiate another loan, in the amount of your tax credit, at the same APR.
Type 2 has a different payment amount for year one than for the subsequent years. In this type of loan, your payments are based on the entire loan amount.
When you receive your federal tax credit, you’ll have the option to use it to re-amortize your loan to secure lower monthly payments. You can also keep the federal solar tax credit, and your payments will remain the same.
Solar.com can help figure out which solar financing option is best for you.
Going Solar Just Got Easier
The new and improved federal solar tax credit has been met with a collective sigh of relief from a solar industry that was racing to squeeze customers in before the previous tax credit stepped down and expired.
Now, the 30% tax credit is here until 2032, and the long-term savings of solar are in reach for more Americans. In addition, the Inflation Reduction Act made significant investments in American solar manufacturing, which should help to further drive down the costs and increase the benefits of going solar.
With that said, now that the tax credit is at 30%, the best time to go solar is yesterday. The sooner you start producing energy, the sooner you’ll start saving.